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TMI Blog2017 (11) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... th the Accounting Standard – 09. Moreover when assessee has produced relevant documents viz. copies of FIRC before the AO to prove the fact that the export proceeds were realized from the six months of the export, disallowance of the deduction u/s 10A of the Act on unbilled revenue and relatable foreign exchange gain is not sustainable in the eyes of law. Consequently, we are of the considered view that the assessee is entitled for deduction of ₹ 12,11,000/- u/s 10A of the Act. - ITA No.1102/Del./2015 - - - Dated:- 27-10-2017 - SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER For The ASSESSEE : Shri Ajay Vohra, Senior Advocate, S/Shri Neeraj Jain Rami Katyal, Advocates For The REVENUE : Shri H.K. Choudhary, CIT DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : The Appellant, M/s. NEC Technologies India Ltd. (hereinafter referred to as the taxpayer ) by filing the present appeal sought to set aside the impugned order dated 29.01.2015, passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short the Act ) qua the assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover of ₹ 21,140 crore, as comparable to the appellant 3.8 That the TPO / DRP erred on facts and in law in rejecting the following companies by applying filter of 75% export sales: ( i) Cigniti Technologies Ltd ( ii) Maveric Systems Ltd ( iii) Indus Networks limited 3.9 That the TPO/DRP erred on facts and in law in applying the filter of diminishing revenue for selection/rejection of comparable companies. 3.10 That the TPO/ DRP erred on facts and in law in rejecting companies having employee cost less than 25 percent of operating costs. 3.11 That the TPO/ORP erred on facts and in law in rejecting CG-VAK Software and Exports Limited as comparable allegedly on the basis that its employee cost to operating cost ratio is 5.56% not appreciating that the correct employee cost ratio is 70.69% 3.12 That the TPO/DRP erred on facts and in law in rejecting the following companies allegedly on the ground that financial statements of these companies were not available for the year ending March 31, 2009 : a) Helios Matheson Information Technology Limited b) Caliber Point business Solutions Limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mindtree Limited 19.12% 16.74% Evoke Technologies Pvt Ltd 20.71% 20.32% Thirdware Solutions Ltd 41.80% 28.29% 3.22 That the DRP/TPO erred on facts and in law in incorrectly excluding the following companies from the final list of comparables: ( i) Goldstone Technologies Ltd ( ii) Quintegra Solutions Ltd ( iii) Saven Technologies Ltd 3.23 That the TPO / DRP erred on facts and in law in not allowing appropriate risk adjustment for the purpose of benchmarking the international transaction of provision of software services undertaken by the appellant allegedly holding that in absence of robust and reliable data risk adjustment could not be considered. Corporate Tax Matters: 4. That the assessing officer erred on facts and in law in making a disallowance of ₹ 9,34,91,383 under section 40(a)(i) of the Act in respect of payment made by the appellant's Japan Branch Office to HCL Japan Ltd, despite the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sale of mobile phones CUP WDV 17,533 7 Reimbursement of exp. To AEs TNMM OP/TC 53,74,233 8 Royalty payment for using brand TNMM OP/TC 7,93,915 3. Assessee in order to benchmark its international transactions in the software development services segment chosen 21 comparables having OP/TC at 11.26% as against 9.63% of the tested parties (the taxpayer in this case) by adopting weighted average for the current year and the immediately preceding two years. In the working of the margins, the taxpayer has not made any working capital or risk adjustment and consequently, the taxpayer was called upon to provide margins of comparable for current year and then he has provided updated margins of 23 comparable companies with arithmetic mean of 11.53% with no working capital or risk adjustment made in the margins of comparables. After applying and discussing various filters by the TPO, he h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Akshay Software 0.91% 2. Cat Technologies Ltd 11.14% 3. Evoke tech 20.71% 4. E-zest Solutions 19.92% 5. Infosys Ltd 45.65% 6. Larsen and Toubro Infotech 22.72% 7. Mindtree Ltd. 19.12% 8. Persistent Systems Solutions Ltd 15.08% 9. Persistent Systems Ltd 32.10% 10. RS software India Ltd 12.41% 11. Sasken Communication Technologies Ltd 19.39% 12. Tata Elxsi 20.41% 13. Thinksoft Global Services Ltd 16.22% 14. Thirdware Solutions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure agreement, available at page 890 of Vol.III of paper book, in order to highlight the profile of the taxpayer and to prove the fact that the taxpayer is a high end service provider and the comparable sought to be excluded are also high end service provider. 14. For ready perusal, para 2.1 of the joint venture agreement, available at page 890 of Vol.III of the paper book, is reproduced as under :- 2.1 The Parties hereby agree that the Company is being established for the purpose of providing offshore centric software engineering services and solutions primarily to NECC, NECST and their Subsidiaries and clients. It is contemplated that at the end of the Initial Term, the Parties shall discuss and review the business of the Company and unanimously agree on the future functioning of the Company including its further Business Plan. In no event, shall anything in this Agreement be construed as obligating NECCC to place any order to the Company for purchasing the software services and solutions. 15. However, when ld. AR for the taxpayer drew our attention towards para 2.2 of the joint venture agreement, available at page 891 of Vol.III of the paper book, it has beco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prietary products Develops/owns proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe, Infosys mConnect, Also, the company derives substantial portion of its proprietary products (including its flagship banking product suite Finacle ) Onsite Vs. Offshore - As much as half of the software development services rendered by Infosys are onsite (i.e., services performed at the customer s location overseas). And offshore (50.20%) (Refer page 117 of the paper book) than half of its service, income from onsite services. The appellant provides only offshore services (i.e., remotely from India) Expenditure on Rs.61 Crores Rs. Nil (as the Advertising/Sales promotion and brand building 100% services are provide to AEs) Expenditure on Research Development ₹ 102 crores Rs. Nil Other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned by the coordinate Bench of the Tribunal in Toluna India Pvt. Ltd. vs. ACIT in ITA No.5645/Del/2011 order dated 26.08.2014 which was rendering services to its own AE on cost plus basis without having any intangible assets or retaining any intellectual property in the work done by it. Coordinate Bench of the Tribunal held Infosys to be not comparable on the ground that it is a giant company having huge capacity to assume entrepreneurial risk, having huge turnover of ₹ 21140 crores and having revenue ownership of branded / proprietary products. 18. Moreover, Infosys is engaged in significant R D activities leading to creation of significant intellectual property during the year under assessment and has incurred substantial expenditure of R D activities to the tune of ₹ 267 crores i.e. 1.3%. 19. Keeping in view the fact that the taxpayer is a low end captive service provider to its AE having no intangibles or branded / proprietary products vis- -vis Infosys and following the decision rendered by Hon ble High Court in CIT vs. Agnity India Technologies Pvt. Ltd. (supra), we are of the considered view that this company is not a suitable comparable for benchmarki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... predominantly relate to providing system integration and software development services in the information technology field; for FY 2007-08 2008-09 the company has revenue from two segments viz. systematic information support and software development services the business constituting this segment are Product Design Services (Design and Development of Hardware and Software), Innovation Design Engineering (Mechanical Design with a focus on Industrial Design) and Visual Computing Labs Division (Animation and Special Effects); that as per P L Account for FY 2008-09, for FY 2007-08 and FY 2008-09, the revenues are from Sales and Services: No further bifurcation given for revenues from software development and services . However, TPO retained this company as comparable by observing that the company is engaged in providing software services by relying upon annual report of the company which is to the effect that, Visual Computing Labs : VCL delivers 3D computer graphics, animation and special effects in the pre-production, production and post-production of content for the film, television, gaming and advertising industry. 25. Comparability of this has been examined by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Pvt. Ltd. and Telcordia Technologies India Pvt. Ltd (supra), we find Tata as not a suitable comparable for benchmarking the international transaction. THIRDWARE SOLUTIONS LTD. (THIRDWARE) 28. The taxpayer sought to exclude this company from the final set of comparables. The ld. TPO however retained this company on the ground that this is into development of software services and its annual report is available in public domain. The ld. DRP also retained this comparable on the ground that its income from IT and software services is more than 75% of the total operating revenue. 29. The ld. AR for the assessee sought exclusion of this company on the grounds inter alia that it has insufficient financial or description information to perform analyses; that it has functional dissimilarity because its revenue from subscription as well as sale of licence and relied upon Egain Communication (P.) Ltd. vs. ITO (2008) 23 SOT 385 (Pune), 3DPLM Software Solutions Ltd. vs. DCIT ITA No.1303/Bang/2012 and St. Ericson India Pvt. Ltd. vs. ACIT ITA No.7821/Mum/2011 ; that Thirdware also owns software/ proprietary products and is also into purchase and sale of licence t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment service provider company and directed to exclude the same from the final set of comparables on the ground that this company is in the trading of software and was purchasing licence and clearing them and purchase and sale of licence business cannot be compared with software business by making following observations :- ( i) Thirdware Solutions Ltd. which had shown PBTT of 67.65%. Copy of profit and loss account of above company collected from the public domain with its annual report is available in the paper book. The profit and loss account is available at page 201 of the paper book. On examination of above accounts, it is seen on the receipt side, under the head 'sales and other income' the taxpayer has shown 'other income' at ₹ 1,41,55,687. The detail given as per Schedule 13 is as under: Schedule 13: Other Income Interest on Deposit 2.953.027 Interest on Bank Deposit 7.600.902 Debtors written back --- Other Income --- Profit on sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en no such deduction u/s 10A is available. 38. Ld. AR for the taxpayer contended that since the income pertaining to unbilled revenue profit is derived from export of software services, the same is eligible for deduction u/s 10A (4) of the Act and relied upon the decision rendered by the coordinate Bench of Mumbai of the Tribunal in ACIT vs. Sonata Software Ltd. 55 SOT 533 , available at pages 982 to 987 of the case laws compendium. 39. Section 10A (4) is categoric enough to explain that profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. This issue has been decided by the coordinate Bench of the Tribunal in Sonata Software (supra) in favour of the assessee. 40. The assessee has also proved before AO the date on which the invoices relating to such unbilled revenue is raised as well as date of realization of such invoices and this fact is not disputed by the AO and is otherwise in accord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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