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2017 (8) TMI 913 - AT - Income TaxInternational transaction of Software development services - selection criteria of comparable - Held that - It is axiomatic that if company A is functionally different from company B , then, such a company cannot be considered as comparable. Two companies can be treated as comparable when both are discharging overall similar functions, though there may be some minor differences in such functions, not marring the otherwise comparability. Notwithstanding the functional similarity, many a times a company ceases to be comparable because of other reasons as well. If, however, in the subsequent year, the related party transactions fall below that barrier, then such company would again become comparable. In the like manner, a company might have been treated as non-comparable due to the TPO adopting its entity level results for comparison with the segmental results of the case before him, but in a later case, the TPO may take only the related segment results. In such a later case, the company treated as non-comparable to the first company may become comparable to the second company. Thus, it is clearly deductible that if a particular company has been held to be not comparable in the case of another company, then such former company may not always be non-comparable to the assessee company also. The comparability of each company needs to be ascertained only after matching the functional profile and the relevant reasons of the other company. Ergo, this preliminary contention raised on behalf of the assessee is rejected as devoid of merits. Assessee business of Software solutions and Consultancy services in the area of telecommunication industry, thus industries functionally dissimilar with that of assessee need to be deselcted from final list of comparable. Addition towards Licence expenses - Held that - The assessee agreed to share a percentage of sale price to Aircom, UK. Clause (1) of the Agreement provides that ITP charges to be paid by the subsidiary to the parent company @ 45% of the total sale value of software and support and maintenance charge. Pursuant to this Agreement, the assessee raised invoices on certain customers in India. The invoice value was shown as its income and the amount paid to its AE was shown as Licence fee expenditure in its Annual accounts. We are at loss to appreciate as to how the assessee can be said to have created an Intangible asset by paying the Licence fee to its AE in respect of sales made. Such payment @ 45% of the invoice value was the obligation of the assessee ab initio without which it could not have procured the license of ENTERPRISE suite for sale in India. This amount can be loosely characterized as cost of goods transferred to the customers in India, which has necessarily to be allowed as a revenue expenditure. Similar view has been taken by the tribunal in its order for the immediately preceding year. We, therefore, overturn the impugned order on this score and direct the deletion of addition of ₹ 112.50 lac and odd made by the Assessing Officer.
Issues Involved:
1. Addition related to international transaction of 'Software development services'. 2. Transfer pricing adjustment in relation to intra-group services. 3. Addition towards license expenses. Detailed Analysis: 1. Addition related to international transaction of 'Software development services': Background: The assessee, a 100% subsidiary of Aircom International Ltd., UK, reported international transactions involving 'Software development services' and used the Transactional Net Margin Method (TNMM) to determine the arm's length price (ALP). The TPO adjusted the ALP, leading to an addition of ?37,28,929. Tribunal's Observations: - The Tribunal acknowledged the use of TNMM as the most appropriate method and noted no dispute regarding the assessee's calculation of its own margin. - The primary contention was the inclusion and exclusion of certain companies as comparables. Preliminary Objections: - The Tribunal dismissed the Department's objection that the assessee cannot challenge the inclusion of companies it initially chose as comparables, citing that there can be no estoppel against the provisions of the Act. - The Tribunal also rejected the broad proposition that companies held incomparable in other cases should automatically be excluded, emphasizing the need for a detailed functional analysis. Information Collection by TPO: - The Tribunal upheld the TPO's right to collect information under section 133(6) of the Act, provided the assessee is confronted with such information and given an opportunity to respond. Comparability Analysis: - Avani Cincom Technologies: Excluded due to functional dissimilarity, as it provided consulting IT services in addition to software development. - Bodhtree Consulting Ltd.: Excluded due to differences in revenue recognition models and functional dissimilarity. - e-Zest Solutions Ltd.: Included, as it was found to be engaged in high-end technical services similar to the assessee's KPO services. - Infosys Technologies Ltd.: Excluded due to significant differences in scale, risk profile, and ownership of branded products, following the precedent set by the Delhi High Court in Agnity India Technologies. - Kals Information Systems Ltd. (Seg.): Excluded due to revenue from software products and training, which the assessee did not engage in. - Persistent Systems Ltd.: Excluded due to involvement in software product sales, making it non-comparable. - Quintegra Solutions Ltd.: Excluded due to ownership of software and copyrights, which the assessee did not have. - Softsol India Ltd.: Included, as it was solely engaged in software development services. - Tata Elxsi (Seg.): Excluded due to involvement in integrated hardware and software solutions. - Thirdware Solutions Ltd.: Excluded due to significant revenue from SEZ/STPI exports and software licenses. - Wipro Ltd. (Seg.): Excluded due to functional dissimilarity, brand value, size, and recent mergers affecting financial results. Companies Excluded by TPO: - Arman Software Pvt. Ltd.: Included, as the TPO's reasoning for exclusion was found incorrect. - Akshay Software Technologies Ltd.: Excluded due to involvement in product sales. - Nihar Info Global Ltd.: Excluded due to involvement in software product sales. - VMF Softtech Ltd.: Excluded due to outsourcing work, which was conceded by the assessee. 2. Transfer pricing adjustment in relation to intra-group services: Background: The assessee paid ?126.63 lakh as Management fees to AEs, which was claimed as payment on a cost-to-cost basis. The TPO determined the ALP as Nil, leading to an addition. Tribunal's Observations: - The Tribunal noted that a similar issue was raised in the previous assessment year and was restored to the AO/TPO for fresh decision. - Following the precedent, the Tribunal directed the AO/TPO to decide the issue afresh in line with the Tribunal's order for the assessment year 2007-08. 3. Addition towards license expenses: Background: The assessee debited ?172.51 lakh as license expenses, which the AO treated as an intangible asset, allowing depreciation and adding back the remaining amount. Tribunal's Observations: - The Tribunal found that the payment was a contractual obligation for procuring the license of 'ENTERPRISE suite' for sale in India. - It was characterized as a revenue expenditure, not creating an intangible asset. - Following the Tribunal's decision for the previous year, the addition of ?112.50 lakh was deleted. Conclusion: The appeal was partly allowed, with the issues related to transfer pricing adjustments remitted to the AO/TPO for fresh determination, and the addition towards license expenses deleted.
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