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TMI Blog2014 (10) TMI 852X X X X Extracts X X X X X X X X Extracts X X X X ..... c turn over) Total Turn Over Non deduction of tax at source - foreign currency expenditure in relation to recharge of international assignee cost were considered as technical service fee - Held that:- The issue requires a revisit by the Assessing Officer. Whether the employees of the affiliates abroad were rendering services to the assessee company, as a part of any technical services agreed to be rendered by such affiliates to the assessee, has to be seen based on the verification of actual services rendered by them. Assessee should also be given an opportunity to show that the employees came to India only on a secondment and had not rendered any technical services on behalf of the affiliates abroad. We, therefore, set aside the order of the Assessing Officer in this regard and remit the issue back to the file of the Assessing Officer for consideration afresh. - Decided in favour of assessee for statistical purposes. TPA - selection of comparable - Held that:- Assessee here is engaged in the software development business thus comparbles of same nature are to be accepted . X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned AR, the said letter dated 27.08.2007 issued by M/s Cisco Systrems Hong Kong Ltd to Shri Tali Badrinath clearly abroad that the said person though an employee of M/s Cisco Systems Hong Kong was working for the assessee in India. The learned AR submitted that there were two elements for the reimbursements; 75% to the salary cost was paid to the concerned seconded personnel directly by the assessee and 25% of their salaries were paid by their employer abroad and such amount was in turn reimbursed by the assessee to such employer. Expenditure incurred by the affiliates aborad in relation to such seconded personnel were also reimbursed by the assessee. As per the learned AR, there were 4 individuals who were rendering their services to the assessee in India. Their employers abroad was not giving any technical service to the assessee. The assessee had not received any technical services from such affiliate companies. 5. Continuing his arguments the learned AR submitted that tax was deducted by the assessee for the whole of the salary, including the 25% reimbursed by the assessee to the affiliate. Thus the payments were subject to tax deduction at source in India. According to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k design, planning and implementation 2 Srinivas Ketavarapu Director 247 days projects relating to network design, planning and implementation 3 Abhinay Padhye Director 322 days projects relating to network design, planning and implementation 4 Vishan Gupta Vice President 304 days projects relating to network design, planning and implementation" That the payment effected were in relation to the above persons has not been disputed by the Revenue. However, the Assessing Officer took a view that these payments were nothing but fees for technical services falling within section 9(1)(vii) of the Act. According to the learned Assessing Officer the conditions of the assignments were laid down by the affiliates and the salaries, incentive payments were to be administered and paid by such affiliates. In other words, according to the learned Assessing Officer these persons remained the employees of the concerned affiliates and assessee was not able to show the projects on which they had worked with it. Another contention of the Revenue is that deduction of tax at source on the remuneration paid to such seconded employees by the assessee was immaterial. Effectively what Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consult with your Cartus International Assignment Consultant, Chel C Lim or yours Cartus RMC, Macy Lau. You will be an employee of the home country company, paid on the home country payroll. Salary actions including timing and amounts of increases will be consistent with the salary program in effect in your home country. While on assignment, incentive payments will be administered and paid according to the programe in the payroll country. While you are on International Assignment, the method of your pay delivery will be split between home and host locations unless you are in a country with strict exchange rate currency regulations. Life Insurance, retirement plans, disability and healthcare coverage will be provided from your payroll country while on assignment. If you are on the US payroll and your work location is outside of the US, the coverage level for medical expenses incurred outside of the US is typically 80% and you are responsible for 20%. For additional information, please refer to the Benefits web site on the Worldwide Plans. Please refer to the International Assignment Policy for more detailed information regarding Compensation and Benefits. Your assignment is cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax equalization calculation will assume that you left the country within thirty days of separation. Should you resign within the first twelve months you will be required to repay a prorated portion of the relocation/assignment costs. In the event of involuntary termination due to performance issues and/or job restructuring, no reimbursement is required. If my employment with Cisco terminates prior to one year of service in the new assignment, I authorize at the time of termination of my employment Cisco Systems, Inc. to withold from my final paycheck any assignment related monies due to Cisco Systems Inc. in accordance with the formula stated above. In the event the amount I owe Cisco Systems Inc. is greater than the amount of my final paycheck, I agree to pay the balance in full to Cisco Systems, Inc. within thirty (30) days of my termination date. Sd/- Thalli Badrinath" The second para of the above letter imply that the letter is being written not by Thali Badrinath, but by his employer. 10. The third document relied on by the assessee is an international assignments tax policy equalization agreement on which no date whatsoever is seen. The said agreement as it appears at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epay any obligation for each taxable year within thirty (30) days. If I fail to repay any obligation to Cisco within thirty (30) days after completion of the tax equalization settlement statement, then, unless Cisco and I have agreed otherwise in writing, Cisco shall have the right to: a) reduce any foreign assignment allowances or reimbursements due to me and/or b) reduce future amounts paid to me whether as wages, salary or other compensation for services performed in light of my havign received wage advances that I have not yet earned. The total obligation will become immediately due and payable if my employment with Cisco or any of its affiliate corporations is terminated, whether voluntarily or involuntarily. If I fail to furnish tax records in response to a request by Cisco pursuant to the Policy, or cease employment with Cisco or any of its subsidiaries for any reason before the tax records needs to complete the year-end tax equalization settlement statement under the policy are available, then Cisco shall have the right to calculate such amounts by making reasonable assumptions of probable taxes. If an amount is owned to Cisco, Cisco shall also have the right to require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessarily means that such affiliates were rendering technical services to the assessee. In our opinion, three cases relied on by the learned DR namely IDS Software Solutions India (P) Ltd, Ariba Technologies India (P) Ltd and M/s Abbey Business India (P) Ltd (Supra) all had different factual scenarios. In the case of IDS Software Solutions, there was an agreement between the U.S. Co which had sent the persons to India, with its Indian subsidiary. It was from such agreement that the Tribunal came to a conclusion that the concerned employees were employees of the assessee during the relevant time. There was also a minutes of the Board of Directors of the U.S Co which substantiated the contentions of the assessee that the deputed persons were working in India as employees of the assessee in India. Similarly in the case of Ariba Technologies India (P) Ltd also, there were agreements between M/s Ariba USA and its Indian subsidiary through which Ariba US had provided services of one of its employees to its Indian subsidiary. In the case of M/s Abbey Business India Services also, there was an outsourcing agreement between Abbey U.K. entered with its subsidiary in India. The Tribunal had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n operating cost. Assessee's profit as the margin on its operating cost came to 14.82%. As per the TP study of the assessee, such margin in the case of the comparable averaged to 13.18% only and therefore, did not call for any adjustment in the Arms' Length Price. 14. Out of the comparable selected by the assessee, the TPO while he was working out the ALP, pursuant to a reference made by the Assessing Officer, rejected 12 and after making his own analysis included 6 fresh comparables. Though the assessee had requested the TPO to consider an additional set of 7 comparables also, this was rejected by the TPO. The final set of 11 comparables considered by the TPO were as under: S.No Company Name Margins of the comparables as per TP orders excluding forex earning. Margins of the comparable as per TP order excluding force earnings, after working capital adj. 1 Akshay Software Technologies Ltd 8.11% 11.56% 2 Bodhtree Consulting Ltd 62.27% 62.78% 3 Infosys Ltd 45.61% 45.08% 4 Kals Information Systems Ltd 13.89% 15.30% 5 Larsen & Toubro Infotech Ltd 20.39% 23.11% 6 Mindtree Ltd (Segmental) 5.52% 7.45% 7 Persistent Systems Ltd 41.40% 42.42% 8 R S Soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fluctuations had nothing to do with the business operations of a tax payer. The DRP had refused to follow the decision of M/s. Saplap India (P) Ltd (Supra). None of the authorities have given any finding that foreign exchange fluctuation gains were relatable to any capital receipts or outgoes. Assessee had given a break up of foreign exchange gain in which it had specifically excluded the exchange loss on purchase of fixed assets. We are of the opinion that the foreign exchange fluctuation gain arising to the assessee on realization of trade debtor's, payment to creditors etc., were nothing but operational income. In the case of M/s Cisco Systems India (P) Ltd (Supra) which is not only an affiliate of the company, within the same group, but also engaged in a similar line of business like that of the assessee, it was held by this Tribunal as under: "23. We have considered the rival submissions. In the course of hearing before us, the ld. counsel for the assessee also filed a segment wise break up of foreign exchange fluctuation gain, the same is given as Annexure-I to this order. It can be seen from the aforesaid chart given by the assessee that the total foreign exchange gain on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P/OC 14.82% 37,.38% We, therefore, direct that margin of 37.38% computed by the assessee be verified and accepted if found correct. Such margin is to be compared with the PLI of the selected comparables, in line with the directions given by this Tribunal in the case of Cisco Systems India (P) Ltd (Supra). 19. On the second aspect, viz. selection of comparables, the learned AR submitted that 4 of the comparables namely, Bodhtree Consulting Ltd, Infosys Ltd, Kals Information Systems Ltd and Tata Elxsi Ltd have to be excluded, considering the decision of the Tribunal in Cisco Systems India (P) Ltd (Supra). According to him, if these companies are excluded and forex is considered as operating income, then assessee's profit margin will be much higher than that of the comparables and it will not be necessary to consider the additional comparables submitted by the assessee before the TPO. Per contra, the learned DR supported the authorities. 20. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd (Supra)is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:- "11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly." The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies. 26.3 KALS Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable." Following the aforesaid decision of the Tribunal, we hold that KALS Information Systems Ltd. should not be regarded as a comparable. 26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of ₹ 230 crores in the total segment revenue of ₹ 263 crores. Even if we consider the other two subsegments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions : "It is very pertinent to mention here that the company wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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