TMI Blog2019 (6) TMI 1696X X X X Extracts X X X X X X X X Extracts X X X X ..... rect Ld.TPO/AO to exclude this company from final list of comparables for benchmarking international transactions. Cat Technologies Ltd. (standalone) - This company is running both software development and maintenance support services. Further, Schedule IX of the Profit and loss account of this company shows that this company is deriving a sum of Rs.8,49,39,375/- from out of software development and consulting services. However no segmental data is available and as stated by Note No.7 of Notes on Account that the company's exclusive business is medical transcription and training software development and consulting services which should be treated as the only reportable segment. We, therefore, direct Ld.TPO to exclude this company from the final list of comparables. Thirdware Solutions Ltd. - As observed that that this company derives income from sales whereas other income in Schedule XII relates to sales shows that this company is deriving income from sales of licences, from software services, from export of SEZ unit, from export from STPUI unit and a sum from subscriptions. No segmental information is available. We accordingly direct Ld.AO to exclude this company from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer pricing documentation undertaken by the Appellant u/s 92C(3)(c ) of the Income-tax Act, 1961 ( the Act ) and undertaking a fresh analysis. 3. Rejection of use of multiple year data The DRP erred in upholding the action of the TPO of rejecting use of multiple year data and using data for the Financial Year ( FY ) 2008- 09 only. 4. Eligibility under section 10A of the Income-tax Act, 1961 The DRP and the TPO erred in not appreciating that the Appellant is eligible for tax holiday under section 10A of the Act for the software development services and hence, there is no incentive for shifting of profits. 5. Use of additional/modified filters The DRP erred in upholding the TPO s action of using the following additional/modified filters. i. Diminishing Revenue/Persistent Loss Filter Rejection of comparables having diminishing revenues or persistent losses; ii. Use of turnover filter Rejection of comparables using minimum turnover criteria. Without prejudice, the DRP erred in not adjudicating on the Appellant s contention of usage of turnover range on the basis of factor of 5 times; iii. Different Financial Year-end Filter Reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii. India Tourism Development Corporation Limited; and iii. Overseas Manpower Corporation Limited. 10. Non-inclusion of comparable companies in the final set The DRP erred in upholding the TPO s action of not including Technicom Chemie India Ltd. and Ma Foi Management Consultants Limited as comparable to business support services though these companies qualify all the filters adopted by the TPO. 11. Carving out of technical support services from business support services The DRP erred in upholding the TPO s action of carving out technical support services from the business support services rendered by the Appellant and not appreciating that primarily the technical support services would fall within the ambit of business support services. 12. Selection of functionally different companies as comparable companies to technical support services The DRP erred in upholding the TPO s action of not undertaking an objective comparative analysis and inter alia selecting the following companies as comparable to the technical support services rendered by the Appellant, which are functionally different: i. Archohm Consultant Private Limited; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In compliance to statutory notices, representative of assessee appeared before Ld.AO and filed requisite details/documents as called for from time to time. 2.1. As assessee had entered into international transactions during year under consideration, reference under section 92C was made by Ld.AO. Ld.TPO upon receipt of reference issued notice u/s 92C (2) of the Income Tax Act, 1961 (the Act) read with 92D (3) of the Act and called upon assessee to submit documents maintained in terms of transaction entered into by assessee with its AE. Ld.TPO observed that assessee is wholly owned subsidiary of QUALCOMM group and provides following services to the group: R D services in new technologies for enhancements and improvement of groups existing and new products; Development of wireless communications and application software, firmware and hardware for QUALCOMM group products; and Business support and market research services to QUALCOMM group. Ld.TPO further observed that assessee during year entered into following international transaction of software development service and chip design services amounting to Rs.5,45,65,79,588/-, and business support services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of Business Support Service segment, called upon assessee to give margins of comparables selected based upon current year data, which was determined at 6.49%. 2.4. Ld.TPO thus issued show cause notice to assessee under these 2 segments. He objected for various filters adopted by assessee as assessee used multiple year data instead of current year data, Ld. TPO objected for not correctly analysing functions of comparables. He thus rejected comparables selected by assessee and used following set of comparables with an average margin of 28.74% by applying PLI as OP/TC under software development service segment: No. Company Name OP/TC OP/TC (W/o Fx) 1. Akshay Software 12.38 8.16 2. Aztecsoft 6.98 27.37 3. Bodhtree Consult. 68.63 69.80 4. Cat Tech. 41.69 34.43 5. Goldstone Tech. 51.08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P. DRP while analysing software support service segment, excluded Bodhtree Consultants from list of comparables selected by Ld.TPO, direction was issued to exclude bank charges and Fringe Benefit Tax for computation of margin, DRP also directed for corrections of margins in respect of assessee and certain comparables and to allow working capital adjustment for software support service segment, business support service segment and technical support service segment. However, in respect of carving out of technical support service from business support service segment, and comparables used for computing arm s length price, DRP upheld approach adopted by Ld.TPO. 3.1. Subsequent to DRP directions, Ld.AO passed final assessment order by making an adjustment as under: - software service segment-Rs. 36, 28, 80, 568/- - business support service segment-2, 14, 30, 624/- - technical support service segment 54, 93, 157/-. 4. Aggrieved by final assessment order, assessee is in appeal before us now. 5. Ld.AR at the outset submitted that, Ground No.1 is general in nature and therefore do not require any adjudication. 5.1. Ground No. 4 has been submitted to be as not pressed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al of TP order, it is observed that Ld.TPO has rectified filters used by assessee and has also used comparables selected by assessee for computing the ALP of transaction. 6.2. Ld.TPO by applying separate filters, shortlisted 15 comparables under software development service segment, wherein 10 comparables are selected by assessee and 5 comparables by Ld. TPO as under: S.No. Name of the Company Margins as per Final order Assessee s submission Scenario 1 A Comparables selected by TPO 1 Akshay Software Technologies Limited 7.00% 7.00% 7.00% 2 Aztecsoft Limited 26.36% 26.36% 26.36% 3 Godstone Technologies Limited 9.31% 9.31% 9.31% 4 Larsen Toubro Infotech Limited 20.31% 20.31% 20.31% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd risk assumed by assessee under this segment. Provision of software development and chip design service segment While providing software support development service to the AE, assessee has entered into following international transaction as per TP documentation: S.No. Nature of transaction Method Value of transaction 1. Provision of software design, development and testing services TNMM 4,105,115,692 2. Provision of CDMA chipset design and development services TNMM 1,351,463,896 3. Provision of business support services TNMM 399,742,791 4. Reimbursement to AEs BNR 330,020,812 (A) Functions performed: From TP study it has been observed that Assessee entered into separate research and development agreement (the agreements) with its associated enterprises being QUALCOMM Global Trading and QUALCOMM (parent company). Hyd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AE. Thus assessee has been characterised as captive service provider with absolutely minimal risks. 7. Now with the above background of assessee in terms of functions performed and risk assumed, we shall examine comparability of assessee with the comparables disputed before us. Tata Consultancy Services Ltd (TCS) Assessee objected inclusion of this company proposed to be used in the final set of comparables by Ld.TPO by contending that it was not functionally comparable. Ld.AR submitted that this comparable does not give segmental details of product and services. It has been submitted that this company is a leading global brand, having huge intangibles and significant expenses on R D and that it is a giant risk taking company and has also undergone various acquisition and divestment during year under assessment. Ld.AR thus prayed for its exclusion. 7.1. On the other hand, ld. DR relied upon orders passed by authorities below. 8. We have perused submissions advanced by both sides in light of records placed before us. 8.1. Annual report of this comparable has been placed before us and on perusal of the same, it goes to prove that this company is into provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing full-fledged risk leading to maximum profit having huge revenues and expanding, its turnover on R D having huge intangibles is not a suitable comparable with the assessee, who is only a captive provider operating on a minimum risk. 8.3.1. On the contrary Ld.DR submitted that it is incorrect to say that Infosys is a giant company, because giantness is a comparative factor. He submits that assessee is also a giant with sizable magnitude of its turnover and as a matter of fact, this argument was advanced before Ld. TPO but Ld.TPO with reasons rejected the same. According to Ld.CIT DR, reasons recorded by the authorities below are cogent and convincing and cannot be interfered with. 8.3.2. We have perused submissions advanced by both sides in light of records placed before us. 8.3.3. Undisputedly, assessee before us is a captive service provider that provides 100% services to its AEs only, as desired by its AE. Annual Report of Infosys placed before us shows that this company is into providing diversified services like providing end-toend business solutions that leverage technology thereby enabling clients to enhance business performance. The solutions span over entire sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... field of job placement portal and also plans to expand such operations. It is also submitted that management has accepted that this company is well placed in the market as a leading HR BPO service provider. 10.1. On the other hand Ld.CIT DR submitted that, services rendered by assessee, are similar to services rendered by this company which is very much evident from annual report placed before us under the sub heading Outlook of the company . He further submitted that in so far as running of job portal is concerned, it is just like Naukri.com and does not know whether anything is charged from the user of such website without which information is not safe to exclude this company from list of comparables. 10.2. We have perused submissions advanced by both sides in light of records placed before us. 10.3. It is observed that this company is running both software development and maintenance support services. Further, Schedule IX of the Profit and loss account of this company at page 36 of the annual report shows that this company is deriving a sum of Rs.8,49,39,375/- from out of software development and consulting services. However no segmental data is available and as sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not functionally comparable. It has been submitted by Ld.AR that this company is into diversified business activities deriving income from sale of software as well as products. 12.1. On the contrary Ld. DR submitted that like assessee Tata Elxsi is a software developer, and they are involved in product design services. Ld.CIT DR contended that in profit and loss account, there is no break up, however, referring to observations of Ld.TPO, he submitted that this company is providing software services but only with its verticals, and therefore is comparable with functions carried out by assessee. Ld. CIT DR argued that R D expenses of this company is only 3.26% of its revenue which is not at all substantial. 12.2. We have perused submissions advanced by both sides in light of records placed before us. 12.3. It is observed that this company is engaged in software development services, product designing services, Innovation Design Engineering, Visual Computing Lab Division (animation and special effects) etc. Further under product design services, this company is developing operating software on a wide variety of software ranging from automotive systems, VLSI design, embedde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separate segment called technical support service segment from business support service segment on footing that assessee was engaged in rendering technical services. He submitted that such carving out without any basis is inappropriate as technical support services provided by assessee to its AEs form an integral part of marketing support services performed by it under business support service segment. He submitted that Ld.TPO has accepted the approach adopted by assessee in preceding and subsequent assessment years. It has been vehemently contended by Ld.AR that it is only for year under consideration that Ld.TPO has carried out this segregation which is based on employee cost that the Ld. TPO has attributed to engineering services provided by assessee under the larger segment of business support. He submitted that 10% basis is also an adhoc basis. Ld.AR submitted that no separate agreement exists for rendering technical support services. It has been submitted that no separate payment has been received by assessee for alleged technical support services. Placing reliance upon principle of consistency, Ld.AR submitted that for assessment year 2008-09 and assessment years 2012-13, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 70 Taxmann.com 240 has observed as under: 5.2 The key question which, therefore, falls for our consideration is whether the segregation of these two transactions of payment of Royalty and Fees for technical services from the other international transaction, is justified? 5.3 The Hon'ble jurisdictional High Court in Sony Ericson Mobile Communication India (P.) Ltd. v. CIT [2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 (Delhi), has dealt with the circumstances in which aggregation can be done in the context of AMP expenses. The principles laid down in this case are universally applicable and are not confined to the peculiar facts of that case alone. It has been held that 'transactions includes the number of closely linked transaction.' Dealing with AMP expenses, it held vide paras 80 and 81 that inter-connected international transactions can be aggregated and section 92(3) does not prohibit the set off. Further, in paras 91, 121 and others, it held that the ALP of AMP expenses should be determined preferably in a bundled manner with the distribution activity. Vide paras 194 (i), (ii), (viii) and others it held that for determining the ALP of these trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther laid down emphatically that : 'the contention that as the services and goods are utilized by the assessee for the manufacture of the final product they must be aggregated and considered to be a single transaction and the value thereof ought to be computed by the TNMM is not acceptable. Merely because the purchase of each item and the acceptance of each service is a component leading to the manufacture/production of the final product sold or service provided by the assessee, it does not follow that they are not independent transactions for the sale of goods or provision of services. The end product requires several inputs. The inputs may be acquired as part of a single composite transaction or by way of several independent transactions. In the latter case, the sale of certain goods and/or the provision of certain services from out of the total goods purchased or services availed of by an assessee together can form part of a separate independent international transaction. In such an event, the AO/TPO must value this group of sale or purchase of goods and/or provision of services as separate transaction.' 5.5 When we consider the ratio decidendi of the above referr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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