9911796707
TMI Blog2024 (1) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. The assessee is also engaged in providing software development & related support services to its Associated Enterprises ("AEs"). 3. The return of income of the assessee was filed on 30/11/2017 declaring a total income of INR 26,63,11,380/-. The assessment was concluded at an income of INR 49,28,65,260/- after making adjustment as below: Name of the entity Nature of adjustment Amount Varian Medical System International (India) Pvt. Limited Adjustment on account of provision of warranty services 13,99,71,558 Adjustment on account of interest on outstanding receivables 1,47,66,112 Varian Medical System India Software Pvt. Limited Adjustment on account of software development and related support services 6,61,49,166 Adjustment on account of interest on outstanding receivables 56,67,048 Total 22,65,53,884 4. The assessee has raised following grounds in the present appeal before us: 1. On the facts and in the circumstances of the case and in law, the final assessment order passed by the Learned Assessing Officer ('Ld. AO') pursuant to directions of the Learned Dispute Resolution Paned ('Ld. Panel') under Section 143(3) read with Section 144 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e & Exports Limited' as a comparable company, which was accepted by the Hon'ble ITAT in the Appellant's own case in AY 2011-12. 7. On the facts and in the circumstances of the case and in law, Ld. AO/ Ld. TPO / Ld. Panel erred in excluding companies which are comparable to the Appellant's functions, asset base and risk profile. 8. On the facts and in the circumstances of the case and in law, Ld. AO/ Ld. TPO / Ld. Panel erred in including companies which are not comparable to the Appellant's functions, asset base and risk profile. 9. On the facts and in the circumstances of the case and in law, Ld. AO/ Ld. TPO / Ld. Panel erred in including companies in the comparable set which have failed the quantitative filters applied by the Ld. TPO. 10. On the facts and circumstances of the case, and in law, Ld. AO/ Ld. TPO / Ld. Panel erred in not admitting the claim of the Appellant for granting the working capital adjustment while evaluating the arm's length price. With respect to notional interest on outstanding receivables 11. On the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO / Ld. Panel has erred in computing notional interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee mentions that it undertakes provision of after sales warranty services for the equipments sold by the AEs to the customers in India. As narrated in the transfer pricing study report on page number 168 of the paper book, the warranty services provided by Varian India are categorized as below: (a) One Year Warranty Services Medical equipments sold by Varian AEs warrant for one year free services. The services provided by the assessee under the one year of warranty services include replacing of spares, source wires, servicing of the equipments, etc. These services rendered by the assessee are on behalf of AEs. (b) Extended warranty services In some instances, the warranty period of medical equipment sold by AEs is extended till four years. The assessee provides Annual Maintenance Contract ("AMC") services wherein the assessee is responsible for providing labour services for the maintenance of medical equipment sold by AEs. Further, assessee is also responsible for providing Comprehensive Maintenance Contract ("CMC") services which includes providing labour as well as replacement of spares, parts, etc. during the extended warranty period. 7. The assessee, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been removed from the computation of operating revenue. This resulted into computing a negative margin for the segment at (-) 92.58%. The Ld. TPO did not disturb the comparables of the assessee and applied the median of 6.55% to compute the adjustment at INR 139,971,558 in relation with the aforesaid international transactions in the Transfer Pricing Order. The Ld. AO issued the draft assessment order following the order issued by the Ld. TPO. 11. Aggrieved by the Draft Assessment Order issued by the Ld. AO, assessee had filed objections before the DRP. The DRP has rejected the arguments and rebuttals put forth by the assessee and upheld the view of the Ld. AO / TPO. 12. Before us, Ld. Counsel of the assessee submitted that, Ld. TPO has erred in rejecting the accounting policy followed by the assessee and excluding the amount of accrued revenue from computation of margin. In support of the same, he pointed out that the assessee had accrued warranty income of INR 18,11,42,540 during the year and transferred the said amount from Contract Deferred Revenue account to P&L account. The above amount includes services for which advance was received in the earlier years as well as adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tudy report, annual accounts of the assessee and documents submitted in the paper book. We have also considered the arguments of both the parties. 17. Warranty services, by the very nature, are provided for a period which may extend beyond a financial year. (For the sake of clarity and discussion the year in which warranty services are invoiced is called as Year-1. Subsequent years in which the services are provided are called Year-2, Year-3). Once the tenure of warranty services extends beyond a financial year, the assessee cannot recognize the entire revenue in the Year-1. As per the accounting policies the revenue has to be recognized in Year-1, Year-2 and Year-3 depending upon the tenure of the warranty services. We take an example for the sake of clear understanding of the issue at hand. The assessee has entered into a service agreement with its AE on 1st July 2016 for a period of 3 years and the contract will end on 30th June 2019. Thus, the period of warranty services falls in different financial years as follows: FY 2016-17 (Year-1) 9 Months FY 2017-18 (Year-2) 12 Months FY 208-19 (Year-3) 12 Months FY 2019-20 (Year-4) 3 Months Since the services will be provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be computed by considering the entire revenue of INR 19,16,24,516. This computation is available at page number 3-4 of the order of the TPO and the margin works out to 35.71%. The median margin of the comparables which has been accepted by the TPO works out to 6.55% as available on page number 6 of the order of the TPO. Since the margin of the assessee is higher, the entire transfer pricing addition of INR 13,99,71,558 made by the TPO on account of provision of warranty services, is deleted. Provision of Software Development Services: 22. Now we turn to Ground numbers 5-10 pertaining to provision of software development services. The Appellant is engaged in providing software development & related support services to its AEs. The Functions performed by the assessee in relation with the aforesaid international transaction as per its TP study report is available at paper book page number 450 which is reproduced below: 23. The assessee has earned a margin of 15.51%. Detailed computation of the aforesaid profitability as provided at page number 430 of the paper book is reproduced below: 24. The assessee has selected 23 comparable companies for benchmarking the aforesaid internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange of 19.53% to 30.22% with a median of 23.99%. Accordingly, the TPO made an adjustment of INR 6,61,49,166. The assessee approached the DRP which confirmed the adjustment proposed by the Ld. TPO. 28. Before us the assessee furnished a chart and sought exclusion of 14 companies and inclusion of 8 companies. The chart furnished by the assessee contains the arguments on the aforesaid inclusion and exclusion of comparable companies and also case laws relied upon for the same. The Ld. AR submitted that out of 14 companies, there are 4 companies which fails RPT filter of 25% and therefore the same should be excluded. The Ld. AR further submitted that the remaining 10 companies are functionally dissimilar and therefore fails the comparability test and ought to be excluded. The Ld. DR relied upon the order of the lower authorities in this regard. As far as the inclusion of 8 companies sought by the Ld. AR is concerned, he submitted that 7 companies out of 8 have been used by the TPO in either preceding year or subsequent year. Thus, it was submitted by the Ld. AR that unless the TPO/DRP points out any specific reason for the rejection, these 7 companies should be included in the compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this company is entirely different. Considering the aforesaid submission, the assessee prays that Interglobe Technology Quotient Pvt. Ltd. ought to be excluded in the final set of comparables for determination of the ALP. 29.4 Cybage Software Private Limited: The assessee has argued that this company is not functionally comparable considering it is a technology consulting organization specializing in outsourced product engineering services. More specifically the company performs data analytics, marketing and advertising activities, etc. Further as per the website, Cybage Software is engaged in providing architectural services, application product development, business intelligence services etc. Considering the aforesaid submission, the assessee prays that Cybage Software Private Limited ought to be excluded in the final set of comparables for determination of the ALP. 29.5 Sonata Software Limited: The appellant has argued that Sonata Software fails RPT Filter (i.e. RPT Sales to Total Sales amounts to 56.17%, 47.17%, 52.45% in FY 2016-17, FY 2015-16 and FY 2014-15 respectively). Further the company is not functionally comparable as it is engaged in providing solutions such as R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nabled services. However no separate segmentare reported by the Company. The list of services provided by Cygnet pertains to blockchain, Artificial Intelligence, Robotic process Automation, Cloud, Internet of Things, Tax Technology, Augmented / Virtual Reality, Digital Transformation, Content Management, Microsoft, etc. Considering the aforesaid submission, the assessee prays that Cygnet Infotech Pvt. Ltd.ought to be excluded in the final set of comparables for determination of the ALP. 29.10 InfoBeans Technologies Limited (Formerly Known as InfoBeans Systems India Private Limited): The assessee has argued that the Company is not functionally comparable as it is engaged in the software engineering services primarily in Custom Application Development (CAD), Content Management Systems (CMS), Enterprise Mobility (EM), and Big Data Analytics (BDA) The company has during the year also launched new technology segments - Automation Engineering and Services. Further no segment details are available in the Annual Report. Considering the aforesaid submission, the Assessee prays that Infobeans Technologies Limited ought to be excluded in the final set of comparables for determination of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... providing end to end services such as development of new software, web solutions, enterprise application services, re-engineering and enhancements, application integration and maintenance. The Assessee also submitted that Saven Technologies Ltd. Also holds significant Intangible Assets which is not similar to the software development services provided by the Assessee on Contract basis. Considering the aforesaid submission, the Assessee prays that Saven Technologies Limited ought to be excluded in the final set of comparables for determination of the ALP. 30. Further the Assessee sought inclusion of the following comparable companies rejected by the TPO in the transfer pricing order: 30.1 C G-V A K Software & Exports Ltd. The assessee submitted that C G-V A K Software & Exports Ltd. passes all the quantitative filters adopted by the Assessee as well as the Ld. TPO. The is engaged in providing Software Services (On shore and Offshore, Requirement analysis, designing, development, coding, layout main section, testing and bug fixing), which is functionally comparable with the development, coding and testing of software undertaken by the Assessee. Further, the comparable company is ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessee. Considering the aforesaid submission, the Assessee prays that Sasken Technologies Ltd. ought to be included in the final set of comparables for determination of the ALP. 30.4 Sagarsoft (India) Ltd.: The Assessee sought inclusion of the company Sagarsoft (India) Ltd. as the Company passes all the quantitative filters adopted by the Assessee as well as the TPO. Further Sagarsoft (India) Ltd. is engaged in Software development services, as per the Company overview "Sagarsoft is engaged in business of providing IT services, consulting, technology and next generation services". Further as per the Segment reporting - company is engaged only in software development and consultancy. As per the website, the company is engaged in application development, application support and maintenance and monitoring services for global customers. Hence, Sagarsoft (India) Ltd. is functionally comparable with the development, coding and testing of software undertaken by the Assessee. In addition to above, the aforesaid comparable company is accepted by the TPO as a valid comparable company in AY 2016-17 and AY 2018-19 as a valid comparable company. Considering the aforesaid submission, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee sought inclusion of the company Maveric Systems Limited as the Company passes all the quantitative filters adopted by the Assessee as well as the Ld. TPO. As per the Annual Report, Maveric Systems Ltd. is engaged in Software development services and earns Revenue from Sale of Services. The company is engaged in 'Computer programming activities and software testing activites'. As per the segmental analysis and nature of operations mentioned, the company is engaged in software testing activities. Hence, Maveric Systems Ltd. is functionally comparable with the development, coding and testing of software undertaken by the Assessee. In addition to above, the aforesaid comparable company is accepted by the TPO as a comparable company in AY 2018-19 adjacent year as a valid comparable company. Considering the aforesaid submission, the Assessee prays that Maveric Systems Limited ought to be included in the final set of comparables for determination of the ALP. 30.8 Akshay Software Technologies Limited: The Assessee sought inclusion of the company Akshay Software Technologies Limited as the Company passes all the quantitative filters adopted by the Assessee as well as the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and if the RPT is more than 25% to exclude these 4 companies. We hold accordingly. 33. Now we turn to the other 10 companies argued by the Ld. AR for exclusion. Each company is discussed herein below: 33.1 We noticed that E-Infochip Limited is not functionally comparable company since it is engaged in embedded research and development activity, it holds Inventory and there are no separate segments available in the annual report. 33.2 Dun & Bradstreet Technologies & Data Services Pvt. Ltd. is not functionally comparable since it is engaged in rendering predictive analytics, software development and related technology services and solutions. 33.3 Interglobe Technology Quotient Pvt. Ltd. is not functionally comparable since it is engaged in data processing export services travel technologies, and other support services. Further it is noted that the employee cost to total sales ratio of this company is less than 25% which shows that the business model of this company is different. 33.4 Cybage Software Private Limited is not functionally comparable since it is a technology consulting company specializing in outsourced product engineering services. 33.5 Acewin Agriteck ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ood comparable by the TPO either in AY 2016-17 being the earlier assessment year or AY 2018-19 being the subsequent assessment year. Further, on page number 19-21 of his order, the TPO has given only a general comment against the name of each company "Based on the perusal of the business profile, the TPO is of the view that the company is functionally dissimilar. Hence rejected." It has been argued before us that the TPO or DRP have not pointed out any specific reason for rejection of these 7 companies. Ld. AR has also submitted the orders of TPO as part of the paper book. 36. We are of the considered view that a company which is comparable in AY 2016-17 and/or AY 2018-19 cannot be rejected by the TPO just on the basis of a general and common comment. The TPO has not pointed out any specific reason for rejection of these companies while the same companies were good comparable either in the immediately preceding year or succeeding year. Thus, we direct the TPO to include the following companies in the comparable set: - 1. C G-V A K Software & Exports Ltd. Accepted by the TPO as a comparable company in AY 2016-17 and AY 2018-19 as a valid comparable company. 2. Harbinger Systems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranted by the Assessee to the AE, etc. Ld. AR submitted that the TPO ignored the above submission and proceeded to compute the interest on outstanding receivables for the entire year. 40. Ld. AR pleaded before us that the interest if any, on outstanding balances should be computed considering actual outstanding days of the receivable balance.Further, the Assessee prays that interest if any, is only to be charged on period exceeding 90 days (i.e. as per the credit period followed by the Varian Group).Without prejudice, it was argued that LIBOR plus 200 bps to be considered for computing the adjustment on actual outstanding days for the receivable balances, as upheld in various judicial precedents. Reliance in this regard was placed on the following case laws; o Niko (Neco) Ltd. [2022] 141 taxmann.com 366 (Mumbai - Trib.) o Commvault Systems (India) (P.) Ltd. [2021] 126 taxmann.com 287 (Mumbai - Trib.) 41. Ld. CIT DR, on the other side, vehemently argued that the interest at the rate of Libor plus 400 bps has correctly been applied by the TPO and the same should be confirmed on the basis of computation made by the TPO. 42. We have considered the facts of the case and the argume ..... X X X X Extracts X X X X X X X X Extracts X X X X
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