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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 ..... 10A of the Act. Learned Counsel for the assessee submitted that the DRP had allowed its alternate claim for deducting these amounts from the total turnover also. We find that the deduction given by the DRP is justified in view of the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Tata Elxsi Ltd (349 ITR 98). Accordingly Ground No.1 is dismissed. 3. Vide its Ground No.2, assessee is aggrieved that the foreign currency expenditure in relation to recharge of international assignee cost were considered as technical service fee and disallowed u/s 40a(ia) of the Act, for want of deduction of tax at source. 4. The learned Counsel for the assessee submitted that it had incurred an expenditure of Rs. 5,00,58,000/- as reimbursement of international assignee salaries and Rs. 3,12,72,000/- towards recharge of other costs, during the relevant previous year. As per the AR, these were reimbursements made to its affiliates abroad for the employees deputed by them to the assessee's premises. According to the AR, the assessee was engaged in the business of software development and required expertise of personnel of Cisco affiliates abroad. Therefore, the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss Services (India) Private Limited vs. DCIT in ITA No.1141/Bang/2010 dated 18.07.2012. 6. Per contra, the learned DR submitted that the payments to the affiliates abroad was not limited to salary, but even out of pocket expenditure and other miscellaneous expenditures were reimbursed. Miscellaneous expenditure reimbursed were not for business travel alone. Relying on the decision of Authority for Advance Ruling in M/s A.T.&S. India P. Ltd. (287 ITR 421) the learned DR submitted that simply terming the agreements as secondment agreement would not be determinative of the nature of the payment. According to him, the concerned affiliates abroad were providing technical services to the assessee. Through the services of their employees, assessee was actually receiving technical services from its affiliates. Therefore, as per the learned DR the assessee was bound to deduct tax at source as set out u/s 195 of the I.T. Act. Having not done so, as per the DR, the Assessing Officer was justified in making a disallowance u/s 40(a)(ia). 7. We have perused the orders and heard the rival contentions. The persons seconded by the assessee and work rendered by them is mentioned by the assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 United States. Dear Thali, I am pleased to confirm to you in writing our offer for the position of AS Project Manager V, at Grade 12 reporting to Darren May. It is intended that your assignment will be effective on or about August 27, 2007 and is expected to end on August 12, 2010. You will be based in Bangalore, India as a Cisco Systems International assignee on a 3 years assignment, with repatriation to San Jose, California, United States, your point of origin or reassignment to another location based upon business needs of the Company. The terms and the conditions of your assignment are summarized in the Long Term International Assignment Policy and the following attachments. * Summary of International Assignment Provisions This letter, together with its attachments, states our entire understanding of your assignment. However, this letter does not modify, amend or supersede written Cisco agreements and policies that are consistent with enforceable provisions of this letter such as Cisco's "Proprietary Information and Invention Agreement" and Cisco's Arbitration Agreement. You should not sign this letter unless you understand it. While it is not the intention of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in keeping with both experience and performance. Please acknowledge receipt of this letter and agreement with its terms by signing the two originals and returning one to the person listed below. Sincerely yours, Sd/- Darren May - Hiring Manager Date: 8/27/07" A reading of the above letter brings out certain inconsistencies vis-à-vis the claim of the assessee. The learned Counsel for the assessee had submitted that Shri Tali Badrinath was the Director of M/s Cisco Systems Hongkong Ltd. If that be so, we do not understand how he has been offered a position as a Project Manager reporting to one Mr.Darren May who is only a hiring Manager. The tenor of the letter by itself does not appear to be one that is generally written to a Director. 9. The second document relied on by the assessee is a letter dated 27.08.2007 signed by Shri Tali Badrinath appearing in Page Book Page No.359 which read as under: "CISCO August 27,2007 Thalli Badrinath 160 Toulon Court San Jose, CA 95138 US RELOCATION ACKNOWLEDGEMENT CLAUSE I understand and agree that all relocation/allowance payments made to me or my behalf by Cisco Systems Inc, prior to completing one year of employment in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affecting income, deductions and credits outside the scope of the Policy (i.e. amounts not covered by the Policy) are the responsibility of the employee. Cisco is not liable for any taxes, penalties or interest resulting from a successful challenge by any tax authority of any item not covered by the Policy. In addition, I understand the employee is fully responsible for all penalties and interest charges assessed by any tax authority due to the employee's failure to (1) provide information to Ernst & Young on a timely basis (2) notify Ernst & Young of any significant personal income or investment transactions, or (3) cooperate with Cisco with respect to the tax equalization process. I understand and agree that Cisco will reduce my compensation by an estimated hypothetical tax. The estimated hypothetical tax is an amount which approximates my periodic estimated tax deductions calculated with reference to compensation, benefits, deductions and credits otherwise available to me had I remained in my home country, except as otherwise provided in this Policy. In return, Cisco will advance wages that I have not yet earned to assist with the payment of my actual home and host country tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r M/s Cisco Systems Hongknog Ltd abroad. There is nothing in such documents which would bind the assessee to any of the terms stated therein. Though the assessee is claiming that all persons have been sent to India based on secondment agreements, the fact of the matter is that no such secondment agreement is available on record. What we find is that apart from Shri Thali Badrinath, Shri Srinivasa Ketavarapu and Shri Abhinav were also Directors, whereas Shri Vishan Gupta was the Vice President. It is interesting to have a look at what the learned Assessing Officer has to state in this regard: "3.3 It is manifest from the above that Mr. Badrinath remains an employee of CSI during his assignment to the Branch. The ARs were asked to explain the reasons for which Mr. Thalli K Badrinath was requried to come to India. However, the same has not been submitted despite giving several opportunities. It has been merely submitted that CSI seconded Mr. Thalli K Badrinath to the Branch but it has not been clarified whether the Branch requested CSI to send Mr. Badrinath. In fact even the projects on which he has worked in the Branch have not been stated and it is merely stated that he had rendere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nical 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. Ground No.2 of the assessee is allowed for statistical purposes. 12. Now we take up the grounds relating to the transfer pricing issues. Through Ground Nos. 3 to 16, the assessee assails the application of certain filters by the Assessing Officer for excluding certain companies considered by it as proper comparables and further assails the treatment given to foreign exchange fluctuation income, which was not considered as operating revenue. 13. Assessee is a branch of M/s Cisco Systems Services B.V. having its registered office in Amsterdam. The Branch was started after obtaining necessary approval from the Reserve Bank of India. The assessee was giving software support services to various affiliates of Cisco Group. Such services, inter alia, included development of software tools, application and processes etc. The assessee had an agreement with M/s CSS-BV entered on 09.07.2009 by which it was to provide software support services to the parent company abroad, for which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; The objections taken by the assessee before the DRP in this regard were overruled. 15. Now before us the learned AR submitted that foreign exchange gain of Rs. 44,19,30,032/- were entirely operational in nature, coming out of debtors realization, creditors payments, inter company cross charges etc. According to him the gain on foreign exchange fluctuation was arrived after adjusting the exchange loss on purchase of fixed assets coming to Rs. 1,47,634/-. As per the learned AR, there was no dispute that foreign exchange fluctuation gain was on account of operational transactions. Relying on the decision dated 14.08.2014 of the Coordinate Bench in the case of one of the affiliates of the assessee, namely Cisco Systems India (P) Ltd vs. DCIT in IT(TP)A No.271/Bang/2014, the learned DR submitted that foreign exchange fluctuation gain had to be treated as a part of operating income. The learned AR submitted that the observations of the DRP in the case of the assessee were very similar to those made in the case of Cisco Systems India (P) Ltd (Supra) and even the assessment year was the same. As per the learned AR the Tribunal had come down heavily on DRP's refusal to follow the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for rendering software development services. It is therefore clear that the foreign exchange fluctuation in question has to be treated as part of the operating income of software development services segment of the assessee and the operating profit to operating cost has to be determined accordingly. The DRP has refused to follow the decision of ITAT Bangalore Bench in the case of SAP Labs India Pvt. Ltd. (supra). In our view, the decision rendered by the Tribunal is binding on the DRP and the DRP cannot be heard to say that the decision rendered by the Tribunal is incorrect and refuse to follow the same. In the given facts and circumstances, we hold that the foreign exchange gain from software development services has to be considered as part of the income from software development services while computing the margin of the assessee and accordingly the margin of 12.67% computed by the assessee is directed to be adopted. 18. Once operating margin of the assessee is recomputed considering forex as operating in nature, its profit level indicator would arise to 37.38% as under: Cisco Systems Services B.V.India-Branch A.Y 2009-10 Margin computation Particulars As per TPO Consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation 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. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;s case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the "software products and services" segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under "Revenue recognition" in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below:" 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable". 21. Assessee here is also engaged in the software development business and therefore, for the same reasons as mentioned by the Tribunal in the case of M/s. Cisco Systems India (P) Ltd (Supra), we direct the Assessing Officer to exclude these companies from the set of selected comparables. 22. Accordingly, we direct the TPO to rework the PLI of the comparables after including the operating foreign exchange gains also. In so far as the comparables rejected by the TPO are concerned, the learned AR having submitted that these would be irrelevant once foreign exchange fluctuation gain is considered as operating income, we do not find it necessary to adjudicate. In the result Ground Nos.3 to 16 of the assessee are partly al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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