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TMI Blog2018 (5) TMI 146X X X X Extracts X X X X X X X X Extracts X X X X ..... ining of value at NIL cannot be upheld. We modify the order of the DRP and direct the AO to accept the purchase price as at Arm’s Length. - Decided in favour of assessee - ITA No. 305/Hyd/15 And 405/Hyd/15 - - - Dated:- 27-4-2018 - SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER For The Revenue : Shri K. Ashok Kumar, CIT-DR For The Assessee : Shri P. Murali Mohan Rao, AR ORDER PER B. RAMAKOTAIAH, A.M. : These are cross-appeals by Revenue and Assessee against the order(s) of the Assessing Officer (AO) u/s. 143(3) r.w.s. 144C(5) of the Income Tax Act [Act]. 2. Brief facts of the case are that, assessee is a partnership firm (LLP) registered with Registrar of Firms under Partnership Act, 1932. Value Labs Sdn. Bhd, ValueLabs Inc ValueLabs UK Limited are wholly owned subsidiaries of assessee. 2.1. Major business activities of assessee are as under: i) Providing software development services, maintenance, testing, remote infra management, etc. to its customers. ii) Software development services required for Associated Enterprises (AEs) like ValueLabs Inc ValueLabs Sdn Bhd. Assessee has registered wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. With respect to ALP adjustment of ₹ 4,63,99,830/- in respect of software development services, the DRP has directed in para No.10, to exclude cost of depreciation from the companies in arriving at operating cost and to arrive at profit margin accordingly and rework the ALP as per law. With respect to ALP adjustment of ₹ 41,75,25,442/- u/s.92CA(3) of the Act in respect of DSP Software and IP rights, the DRP has directed in para No.12 to restrict the ALP adjustment to ₹ 19,22,44,500/ - in respect of ALP adjustment towards DSP Software and IP rights; 6. Consequent to the Directions of the DRP, AO has passed the order 30-01-2015 making addition of ₹ 19,22,44,500/- towards ALP adjustment in respect of DSP Software and IP rights. With respect to adjustment on software services, after due verification, AO has mentioned that the margin of the taxpayer after excluding depreciation was 73.62% and the average margin of the comparable companies after excluding depreciation was 29.43%, hence no ALP adjustment was required to be made in respect of Software development services. Aggrieved, both Revenue and Assessee filed appeals raising various grounds. 7. The maj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and it is also a fact that the Indian entity had been compensated out of such acquisition to diversify its ambit of technical services provided to various clients. 12.2. It is also clear that the assessee has expanded its clients by providing technical services after acquiring the DSP software. This was evidenced by the increase in the revenue in the subsequent year of acquisition. Therefore, there is benefit accrued to the assessee company by virtue of acquisition of DSP software in its armory. 12.3. The TPO largely guided by some answers given by one of the executive of the Indian Company to the officers of the International Transactions in the course of survey. The TPO has not taken totality of the issue involved, instead proceeded on the basis of few answers given by such executive. From the statement of the Sudhir John it is clear that the technical personnel who are competent to develop the software are the employees of Malaysian entity, though one of them left the company subsequently. Further, the assessee also stated that the VL Malaysia engaged the services not only the Indian entity but also the infrastructure facilities provided in MCS for the developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 7,22,44,500/- towards IP rights cannot be allowed as purchase value in the hands of the assessee. Thus, in totality the value of the DSP software is redetermined as ₹ 50, 17,81,250/ - as against NIL adopted by TPO AO and ₹ 69,40,25,750 (Rs.62,17,81,250 + ₹ 7,22,44,500/-) shown by the assessee. 8. On the above issue, the assessee has contested the bifurcation of the amount and partial confirmation by the DRP whereas the Revenue has aggrieved not only on the reduction of the price by the DRP but also the direction of the DRP in excluding the depreciation from the operating cost while examining the ALP in software development. 9. Learned Counsel for the assessee referring to the submissions made before the DRP reiterated that the DSP Software package was developed by Value Labs, Malaysia for which assessee has undertaken certain software programming for which it was remunerated in the respective years. It was submitted that the software development services at Malaysia are considered at Arm s Length by the orders i.e., in FY 2005-06 by the order dated 01-01-2009, for the FY 2006-07 by the order dated 30-08-2010, for FY 2007-2008 by the order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Limited (ITAT, Hyd.) ITA No. 1154/Hyd/2011; ( 2) Market Tools Research Pvt. Ltd. Vs. DCIT, ITA No. 1150/Hyd/2011; ( 3) Schefenackerj Motherson Ltd vs. ITO (123 TTJ 509); ( 4) Qual Core Logic Limited vs. DCIT, ITA No.893/Hyd/2011; ( 5) M/s. BA Continuum India Private Limited (Telangana AP High Court) ITTA No.440 of 2014 dated 16.07.2014 and ( 6) Cambridge Technology Enterprise Limited, ITA No. 364/11/2015. 12. We have considered the rival contentions and perused the paper book on record. On the issue of taking preoperative cost as a basis for arriving at the ALP, the order of the DRP is as under: 9.1 The assessee argued in respect of computation of PL! that the TPO has taken number of comparable companies which are totally dissimilar in function, having extraordinary features like merger, acquisitions etc. Apart from the above contention, the AR also contested the action of the TPO on the ground that the assessee being a firm claimed the depreciation as per the Income-tax Act at the rate of 60%, whereas the comparables being the companies adopted the depreciation as per the Companies Act which comes to around 16.21%. Thereby, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p firm of the assessee as that of companies under Company Law are being different, we do not find any reason to interfere with the decision of the DRP, in taking the operating cost exclusive of depreciation for comparison. Accordingly, the order of the DRP is confirmed and Revenue s grounds on this issue are rejected. 14. Coming to the issue of determination of price for purchase of software, we find that TPO has not analysed the transaction under any of the methods prescribed, but interfered in the business decision by determining the price at NIL, on the basis of so called statement of Executives. DRP has rightly considered that the statement cannot be taken as basis. While accepting that the Value Labs-Malaysia has undertaken the work in it s own hands and part of the activity was outsourced to the Indian entity, DRP has erred in determining a further price to meet the price for earlier services at ₹ 12 Crores, ignoring that the services were paid at market value and there are series of orders by the different TPOs in respect of earlier years holding that the services rendered were at market value / ALP. The DRP seems to have not noticed that the TPO s accepted the remu ..... 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