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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 ..... Software Technology Park of India (STPI). It provides offshore software development services to its various clients in various countries. It also develops the software required for various clients of their AEs. 3. During the year under consideration, assessee has entered into the following transactions with its AE. Sl. No AE Nature of Transaction Amount (Rs) Method 1 Value Labs USA Software Development Services 11,83,39,958 TNMM 2 Value Labs Sdn, Bhd, Malaysia Software Development Services 2,92,77,281 TNMM 3 ValueLabs FZ LLC Dubai Software Development Services 7,01,31,450 TNMM 4 ValueLabs Sdn, Bhd, Malaysia Purchase of Date Service Platform (DSP) Software and IP rights 69,40,25,750 TNMM Assessee benchmarked by aggregating all the transactions and adopting Transactional Net Margin Method [TNMM] as the most appropriate method and submitted Form 3CEB. Assessee has compared its Profit Level Indicator (PLI) of 65.09% with the comparable companies average PLI of 29.19% and found the transactions to be at Arm's Length Price [ALP]. 4. As the matter was referred to TPO for determining the ALP of the transactions, TPO has determined the ALP of the DSP soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to pay any amount for the software purchased and he determined the ALP at NIL. Assessee made detailed submissions before the DRP which were extracted in para 11 of the DRP order from paras 11.1 to 11.19. The DRP has partly considered the assessee's submissions and decided the issue as under:- "12. The panel considered the detailed submissions of the assessee and perused the contentions of the TPO on this ground. The contention of the assessee about lack of jurisdiction of TPO regarding the redetermination of value of the purchase of software is not tenable as the AO had incorporated in the draft assessment order which is the subject matter of appeal before the panel. Since the draft assessment order is passed by the Assessing Officer, the objection raised by the assessee does not merit consideration. Since the impugned order is the draft assessment order as the TP order merges with it. Hence, the draft assessment order is disputed for adjudication. Therefore, the panel is of the view that the assessees contention is to be rejected on the legality of addition 12.1 Having said that it has to be seen whether the TPO 1 AO is justified in recomputing the value of the DSP softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork done in the 4 years by the Indian Company, no proper compensation at Arm's length level was paid. The argument of the assessee that the Indian company had acquired first charge is not convincing to pass on the prototypes developed by the Indian entity to the Malaysian company. There is no doubt nor dispute about basic work done by the Indian Company towards DSP software. The Indian company deserves to be compensated at a reasonable price. In any case, being the AE, the Malaysian entity would have given preference to the Indian entity rather than sale to outside companies. Therefore, such clause does not supercede the compensation point to be received by the Indian company. Accordingly, the panel is of the view that for the services rendered in respect of R&D work, development of prototypes and proof of concept, the Indian company should deservingly to receive a sum of Rs. 12 crores. @ Rs. 3 crores per annum. It has been arrived based on service charges paid by AE to assessee company in subsequent years when it undertook to work on DSP software. Considering the basic and fundamental research work initiated and conceptualized by Indian entity, the panel is of the opinion, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions Branch vide order dated 10-03-2010. It submitted that that there is no need to register any IP Rights under the Malaysian law or under the Indian Copy Right Law and submitted that even after purchase, assessee has also not registered under any Copy Right / IPR Law. Therefore, the stand taken by the DRP is not correct. Elaborating further, it was submitted that the Copy Right comes into existence as soon as the work is created and no formality is required to be completed for acquiring Copy Right. Learned Counsel relied on various case law given in context of Copy Right Act to support that registration is not sine que non or condition precedent to the subsistence of Copy Right or acquisition of ownership thereof. It was further submitted that the DRP itself has agreed that the assessee has purchased the software from Malaysia and in that context when rights are available with Value Labs Malaysia the price paid has to be accepted. It was further submitted that TPO has not analysed the transaction under any of the provisions of section 92C of the Act and hence TPO was not correct in determining the value at NIL and further DRP was also not correct in restricting the amount to Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r profit margin declared in the books of account is on account of higher cost of depreciation not because of the lower transaction value as alleged by the TPO. Accordingly, it is argued to provide level playing field to arrive the correct profit margin on the international transaction executed by the taxpayer. In support of such contention, the assessee placed reliance on the decision of the ITAT Hyderabad in the case of M/s. Market Tools Research Pvt. Vs. DCIT (lTAT-Hyderabad), ITA No.1150/Hyd/2011 which in turn taken the support of Delhi ITAT decision in the case of Schefenacker Motherson Ltd. vs ITO (123 TTl 509) for AY 2003-04 and Schefenacker Motherson Ltd. vs DCIT in ITA No. 4460/Delj07 for AY 2004- 05 and in the case of M/s. Qual Core Logic Limited Vs. DCIT, Circle-16(3), Hyderabad in ITA No. 893/Hyd/2011. 10. The panel noted the detailed submission of the assessee made in presence and also in writing on this issue and found some merit in the submissions of the AR in respect of variable cost of depreciation in assessee's own case being the firm and comparable companies etc. In order to compare the profit margins of comparable companies and assessee company, it is nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Value Labs Malaysia. In view of that, we do not find any reason to support the contention of the DRP that payment of 10% of total cost towards IP Rights cannot be allowed in the hands of the assessee. In fact, neither the TPO nor the DRP can question the business decision of the assessee to state that the value was NIL. The Co-ordinate Bench in the case of IWM Constructions (P.) Ltd Vs. ACIT vide order dated 20th July, 2016, relying on the decision of the Hon'ble Delhi High Court in the case of CIT Vs. EKL Appliances Ltd., (2009 Taxman 200) has held that TPO as well as AO are not correct in holding that the transaction between the assessee and it's AE are sham, particularly since the assessee (IWM Constructions (P.) Ltd) was responsible for designing Highway. Similarly, in the present case also since the product was developed by Value Labs Malaysia, it cannot be stated that it has no Copy Rights. Since the entire value for purchase of software, including Copy Rights / IP Rights, was evaluated by the Deputy Commissioner, Customs at the time of import and was also accepted by the RBI and other Authorities at the time of payment, we do not find any reason to doubt about the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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