9911796707
TMI Blog2018 (7) TMI 1748X X X X Extracts X X X X X X X X Extracts X X X X ..... panies Act, 1956. It is 100% subsidiary of Daimler AG, Germany (DAG). It is stated that it is engaged in the business of providing research and development for automotive engineering to its holding company i.e. DAG. It is stated that the assessee-company is compensated on the cost + mark up of 10%. The return of income for the assessment year 2013-14 was filed electronically on 28/11/2013 declaring total income of ₹ 34,17,11,680/-. The assessee-company also reported the following international transactions in Form 3CEB: Particulars Received/Receivable Paid/Payable Method Used Provision of contract software R&D services 3622659108 TNMM Reimbursement of expenses to AEs 146212588 Repairs and maintenance 4838023 Consultancy fees expenses 289330 Software license fees 41700439 Total Amount 3622659108 193040380 3. The assessee sought to justify the consideration received for the above international transactions to be at arm's length. The assessee-company also submitted TP study report adopting CUP method as the primary analysis and also additionally TNMM as a part of secondary analysis which was considered to be the most appropriate method for the purpose of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a & Different year ending, hence rejected. 12. Maveric Systems Limited -11.87 No data & Different year ending, hence rejected. 13. Mindtree Limited (Segmental) 13.03 Qualifies all the filters of the TPO, However, TPO has considered current year data only and the applicable PLI is 20.23%. 14. Persistent Systems and Solutions Limited 14.70 No data & Different year ending, hence rejected. 15. Persistent Systems Limited 24.30 Qualifies all the Filters of the TPO, However, TPO has considered current year data only and the applicable PLI is 28.27%. 16. Priya Softweb Solutions Private Limited 13.79 No data available in public domain, Hence rejected". 17. R S Software (India) Limited 15.23 Qualifies all the filters of the TPO However, TPO has considered current year data only and the applicable PLI is 17.41%. 18. R Systems International Limited (Segmental) 5.56 The financials are reported for year ending 31st December 2012. Different year ending compared to that of the taxpayer and hence. 19. Sasken Communication Technologies Limited 12.67 The company's wireless software product portfolio comprises embedded software IP for wireless mobile devices, a comprehe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % of its total operating revenues were excluded. v. Companies who have more than 25% related party transactions of the sales were excluded. vi. Companies who have export service income less than 75% of the sales were excluded. By applying the above filters, the TPO accepted 5 comparable entities chosen by the assessee-company and rejected 21 comparables. The matrix of accept or reject of the comparable was chosen by the assessee-company is given supra. Finally, the TPO selected the following comparable entities: SI. No. Name of the taxpayer OP/OC 1. CG-VAK Software Exports Ltd. 20.54% 2. ICRA Techno Analytics Ltd. 17.10% 3. Larsen & Toubro Infotech Ltd. 26.06% 4. Mindtree Ltd. (Seg) 18.19% 5. Persistent Systems Ltd. 28.27% 6. R S Software (India) Pvt Ltd. 17.41% 7. Tech Mahindra Ltd. (Seg) 18.72% Unadjusted average margin 20.90% 5. The TPO computed average profit margin of the comparables finally selected at 20.90% after giving working capital adjustment of 2.97%, adjusted margin of 17.93%. On the above basis, the TPO made the TP adjustment as follows: Arm's Length Mean Margin on cost 20.90% Less: Working Capital Adjustment 2.97% (As per An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch and development services transaction entered by the Appellant with its associated enterprise(s); 4. Ld. AO/DRP/TPO erred, in law and in facts, by not accepting the economic analysis undertaken by Appellant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of ALP in connection with impugned international transaction and holding that Appellant's international transaction is not at arm's length; 5. Determination of the arm's length margin/price using only FY 2012-13 data which was not available to Appellant at the time of complying with transfer pricing documentation requirements is not as per law; 6. Companies comparable to Appellant were incorrectly rejected by applying following quantitative and qualitative filters: (a) Companies having employee cost less than 25% of turnover; (b) Companies having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months); (c) Companies whose export earnings were less than 75% of the sales; and (d) Companies having turnover less than INR 1 crore, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gmental) were chosen as comparable in transfer pricing study, however upon availability of more details in public domain, the companies are found to be not comparable and should be excluded from the final set of comparables. 12. Ground No.l is general in nature and do not require adjudication. 13. Ground No.2 challenges the finding of the TPO as confirmed by the Hon'ble DRP applying TNMM as the most appropriate method. This issue is covered against the assessee-company in the assessee's own case for assessment year 2008-09 in Mercedes Benz Research & Development India (P.) Ltd. v. Asstt. CIT 2016 (3) TMI 1114 wherein it has been held as under: "5.4 We have considered the rival contentions and perused the details placed on record. As stated by the ld. counsel, the issue of selecting the most appropriate method in the earlier two years has been set aside to the TPO. For the AY 2006-07, the same was done by way of Misc. Application and in A.Y. 2007-08, consequent to earlier year's order, the Bench has set aside the issue again. Without prejudice to the same, the Bench has also decided the same under TNMM by excluding certain comparables and given directions in case TNMM is accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in was added to the operating margin, then only it comes to 5%. Generally in a Cost Plus situation, the entire cost spent by the assessee with a mark-up of 5% would be billed to the AE on a periodical basis. The conversion generally done at the prevailing rate of USD or foreign currency involved. Therefore, the basic concept is the margin would be about 5%. In case of any foreign exchange gain, this could increase the margin to that extent. In case of foreign exchange loss on the USD/foreign currency quoted by the assessee, then the margin would come down to that extent. However, as seen in this case, the margin without foreign exchange gain itself is less than 5%. Therefore, in the absence of correct cost structure and billing procedure, it is very difficult to accept the Cost Plus Method and analyse the issue. 5.7 The next contention of the assessee is with reference to CUP method. The assessee states in the Annexure III to 3CEB report that 'there are no internal comparables within the group as entire services of assessee are bought back by AE. Offshore software development work by other companies may represent external comparables. However, data in respect of the same which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate method." Respectfully following the decision of the co-ordinate bench of the Tribunal cited supra, we hold that TNMM is the most appropriate method in the facts of the present case. Accordingly, the ground of appeal raised by the assessee is dismissed. 14. Ground Nos. 3 to 9 and the additional grounds of appeal Nos. 14 to 16 challenge exclusion of the following comparables by TPO as confirmed by the Hon'ble DRP. 14. The learned AO/TPO and Hon'ble DRP erred in accepting Persistent Systems Limited as comparable company by applying unreasonable comparability criteria. 15. The learned AO/TPO and Hon'ble DRP erred in rejecting the following comparable companies by applying unreasonable comparability criteria: (a) Akshay Software Technologies Limited, (b) Cat Technologies Limited, (c) Caliber Point Business Solutions Limited (Segmental), (d) Helios & Matheson Information Technology Limited, (e) R Systems International Limited (Segmental), (f) Cigniti Technologies Limited, (g) Evoke Technologies Private limited. (h) Thinksoft Global Services Limited. (i) Lucid Software Limited. (j) Sasken Communications and Technologies Limited (Segmental). (k) Kal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd technology innovation and also offers complete product life cycle services. ii. The company earns royalty income from its software products. iii. The company owns intellectual properties. iv. Company is involved in providing Outsourced Product Development ("OPD") services. v. Company has differentiated OPD business from software development services. vi. Company is predominantly involved in providing software products, services and technology innovation covering full life cycle of products to its customers. However the primary reporting segments are based upon review of market and business dynamics based on risk and return and accordingly three segments namely (a) Telecom and Wireless, (b) Life science and healthcare and (c) Infrastructure and Systems, were identified. Accordingly there is no breakup available for differet kind of services provided by the company. vii. The company owns huge intangible assets. viii. The company has inorganic development plans in relation to third party acquisition and development of IP's. ix. The company is into in-house research and development. x. The company has received various awards and recognition during the year which al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in product development. The issue has been discussed by the TPO in detail in his order. The assessee has not controverted the findings of the TPO with the help of any material brought on record, The reference of assessee to website of the company is also misplaced, as the same relates to entire group of Persistent Systems. Further, the annual report of the company is more reliable than the website as the latter is dynamic in nature and may represent the status at the time of accessing the same rather than the status during the relevant financial year. Further the purpose of website is to advertise and to attract more clients and thus it may reflect the capabilities of the group rather than the actual functioning during a specific year. On perusal on annual report of Persistent Systems, it is observed that the company is developing software for its customers, who in turn are in business of software product development and outsourcing the work of software development to this company. Thus the assessee has wrongly inferred that M/s. Persistent Systems Ltd. itself is in software product development. The issue has been detailed by the TPO in her order also. In fact, the assessee itsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the ITAT held Persistent Systems Ltd. to be a proper comparable for software development activities. Considering above, the objection of the assessee is not accepted. 9.7 The assessee has argued that Persistent Systems is incurring expenditure on Research and Development (R&D). The submissions of the assessee have duly been considered. The submissions of the assessee to support its arguments are just assertions, without any material basis. On perusing the annual report of Persistent Systems, it is observed that the expenditure on R&D is less than 0.35% of the operating expenditure. This itself shows that the claim of the assessee is highly exaggerated, with the sole purpose to get the company excluded from the list of comparables. The assessee itself is into software related R&D for its AE. Considering above, the objection of the assessee is not accepted. 9.8 The assessee has argued that there was occurrence of extraordinary events during the year under consideration in the case of this company and so it should not be considered as a comparable. The submissions of the assessee have duly been considered. On perusal of the annual report the company, it is observed that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd maintenance of ERP products. The TPO has selected Mindtree Limited which provides similar kind of function and hence the company is comparable. ii. The company is predominantly engaged in providing IT services to its client. iii. The revenue from software services account for 99.45% of the total revenue of the company. iv. The foreign exchange earnings from export of software services which amounts to 93.55% of the total revenue of the company. Reliance was placed on the decision of the co-ordiante bench in the case of Novell Software Development India [IT (TP) Appeal No. 281 (Bang.) of 2015] 16.2 We heard rival submissions and perused the material on record and the Annual Report placed at pages 1873 to 1933 of the paper book. The only ground on which this company was excluded by the TPO as well as the DRP was on the ground that the functions performed by this company are not in the nature of software development services. It is in the multiple segments including software products as well as re-sale of ERP products and no segmental information was available. It is further observed that this company was involved in procurement, installation, implementation, support and m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices as per the annual report. Further, the revenue from software development services is more than 93.93% of the total revenue. (ii) As per response to 133(6) notice, it is very clear that the company is engaged in software development services 17.2 We heard rival submissions and perused the material on record and the Annual Report placed at pages 1988 to 2059 of the paper book. In the schedule 20 forming part of the Annual Report of the company at page 64 of the Annual report and placed at page 2052 of the paper book breakup of sales and services is given below: PARTICULARS AS ON 31.03.2013 (Rs.) 31.03.2012 (Rs.) 20. Sales & Services Consultancy Fees Receipts Medical Transcription Receipts 4,342,700 161,303 Software Development Receipts 55,221,160 73,374 Course fees 178,350 5,320,400 Local Software Development 578,662,660 993,975,193 Total 638,404,870 999,530,270 17.3 From the above schedule, it is clear that the revenue from software exports is less than 75% of the total revenue and this fact is further confirmed by the information revealed in schedule No. 31 of the Annual Report wherein total earning in foreign currency from software development is on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire revenue is derived from sale of software testing services. The only issue which requires to be adjudicated is whether software testing service can be equated with software development services. The term 'software development services' has not been defined under the Income-tax Act, however, rule 10-TA of the IT Rules dealing with Safe Harbour Rules for international transactions, under clause (m), has been defined as under: "IOTA. For the purposes of this rule and rule 10TB to rule 10TG,- (m) "software development services" means,- (i) business application software and information system development using known methods and existing software tools; (ii) support for existing systems; (iii) converting or translating computer languages; (iv) adding user functionality to application programmes; (v) debugging of systems; (vi) adaptation of existing software; or (vii) preparation of user documentation, but does not include any research and development services whether or not in the nature of contract research and development services' From the above, it is clear that the functions of software testing are not a part of software development and therefore, softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it follows different accounting year. The Hon'ble DRP also confirmed the same. 20.1 Being aggrieved, the assessee-company is before us seeking inclusion of this company on the following grounds: i. The company has 3 segments namely, (1) Software development and Customisation services, (2) BPO services and (3) Corporate &. others. The Software Development and Customisation segment has been selected as comparable to the Appellant. ii. Extrapolated data can be considered in the light of Delhi Tribunal ruling in the case of Mckinsey Knowledge Centre India (P.) Limited and Techbooks Electronic Services (P.) Ltd. (supra). iii. The company has won various accolades in software development sector. 20.2 We heard rival submissions and perused material on record. There is no dispute that the company follows different accounting year. The Hon'ble Delhi High Court in the case of Mckinsey Knowledge Centre India (P.) Ltd. (supra) held as follows: "14. The Revenue is in appeal before this Court questioning the admissibility of the abovementioned comparables while computing Arm's Length Price regarding the IT support services after the TPO and AO rejected the abovementioned companies bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al report of the company placed at pages 1934 to 1960. There is no dispute that the company was following different accounting year. Appropriateness of this filter is not under challenge at any stage of proceedings. The Hon'ble Delhi High Court in the case of Mckinsey Knowledge Centre India (P.) Ltd. (supra) held as follows: "14. The Revenue is in appeal before this Court questioning the admissibility of the abovementioned comparables while computing Arm's Length Price regarding the IT support services after the TPO and AO rejected the abovementioned companies but was later allowed by the CIT (A) and ITAT. While the AO had confirmed the findings of the TPO, the Ld. CIT (A) after considering the assessee's submissions accepted all the four companies rejected by the TPO. The revenue submits that Fortune Infotech Ltd. was correctly rejected by the TPO because the company had different financial year ending on December 2006, whereas Assessee's financial year ended on March, 2006. There is nothing shown to the court that supports the revenue's arguments that the ITAT fell into error in holding that if a comparable is following different financial year then the same cannot be included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the TPO. However, the TPO rejected this company on the ground that it fails to pass through the RPT filter less than 25%. The Hon'ble DRP also confirmed the exclusion of this company on the ground that it is involved in the plain software testing and validation which cannot be equated with software development. The relevant findings of the Hon'ble DRP are reproduced below. (i) Thinksoft Global Services Ltd: The assessee has argued that this company has been rejected as a comparable by the TPO by holding that no data is available for AY 2012-13. This was submitted by the assessee that annual report and financials were duly submitted to the TPO and as such finding of TPO are incorrect. The submissions of the assessee have duly been considered. On perusing the order of the TPO, it is observed that rejection of this company as a comparable has been discussed by TPO on page 24 of his order. This company appears in the search matrix of TPO by the name of SQS India BFSI Ltd. as name of the company had changed. The company has been rejected as a comparable by the TPO by holding that the same fails the RPT filter of 25%. The assessee has not controverted these findings of the TPO and v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of this company on the ground that the company is engaged in rendering software development services and 100% of the total revenues is derived from software services. 23.2 We heard rival submissions and perused material on record including the Annual Report placed at pages 2902 to 2998 of the paper book. At page 2909 of the paper book it is stated as under: "We at Thinksoft Global Services Ltd., have nurtured a tradition which fosters the pursuit of excellence in our chosen area - the specialized world of independent domain focused software testing for the Global Financial Services Industry." From the above it is clear that this company is solely into software testing which cannot be equated with software development services in the light of definition of software development given in clause (m) of rule 10.TA of the IT Rules extracted supra. Therefore, we uphold exclusion of this company from the list of comparables. Lucid Software Ltd. 24. This company was selected by the assessee-company in its TP study. The TPO rejected this company on the ground that it is functionally different as it is involved in product development. To come to this conclusion, the TPO had placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant information from the Annual Report. The findings of the Hon'ble DRP are as under: (g) Sasken Communication Technologies Limited: This company was rejected by the TPO by considering it as functionally different. The assessee has argued that company is functionally similar to it. The submissions of the assessee have duly been considered. The annual report (Notes to financial statements) of this company, specifies business of the company. From the same, this can be observed that the company is operating in different segments, which include: * Research and development consultancy, * Wireless software products, * Software services and works Thus software services are a part of the overall business profile of the assessee. This would not matter as to which type of the software is developed by Sasken or who are its clients for this segment as the basic function remains software development services. However, in addition to the software development services, the company is also operating in two more business segments, which cannot be considered as software development. The profile of the company clearly indicates that it is providing Research and development consultancy to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 26. This company was proposed as comparable by the assessee-company during the course of proceedings before the TPO. The ld.TPO rejected this by holding that this company was engaged into both development of software and development of software products. The findings of the TPO were confirmed by the Hon'ble DRP. 26.1 Being aggrieved, the assessee-company is before us seeking inclusion on the following grounds: i. After the thorough review of the annual report of the comparable it was observed that the company is majorly engaged in rendering software development services. ii. As per the response received u/s 133(6), it was mentioned that the company derives its major income from the software development services. 26.2 We heard rival submissions and perused material on record including the Annual Report of the company placed at pages 3012 to 3038 of the paper book. From Schedule No.16 to the Annual Report placed at page No.3033 of the paper book, out of total revenue of ₹ 2,52,00,499/-, revenue from export of software is ₹ 2,48,00,000/- which is obviously more than 75% of total earnings. However, from mere perusal of Annual Report, it is not clear whether this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee are based on facts which were not there before the lower authorities. The additional grounds of appeal require verification of facts and cannot be raised for the first time before us without proper application for admission of the same. A ground can be raised before the appellate authority for the first time only if it is able to satisfy the appellate authority that this ground raised was bona fide and same could not have been raised earlier for good and sufficient reasons and no verification of facts is required and the facts relevant to issue are on record. In such cases, additional ground can be allowed. In the present case, there was no material on record to support such a claim nor this issue was subject matter of proceedings before the AO or Hon'ble DRP. Therefore, no new claim can be allowed in the light of the decision of the Apex Court in the case of Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1. Furthermore, there is nothing in the petition for admission of additional grounds of appeal indicating reasons which prevented the appellant/assessee from raising a claim for deduction of expenditure incurred on ESOP for the assessment year under considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not made before the Assessing Officer or the CIT (A) but was made for the first time only before the Tribunal nor was there any evidence in support of the claim for the subject assessment year on record. Thus it stands covered by the above decision in Gurjargravures (P.) Ltd. (supra). The aforesaid decision of the Apex Court was subject matter of consideration in Jute Corporation of India Ltd. (supra) wherein the Court while distinguishing Gurjargravures (P.) Ltd. (supra) held that the additional ground could also be raised before the appellate Authority if such ground could not have been raised at the earlier stage i.e. when the return of income was filed. This is only when the assessee is able to satisfy the appellate Authority that the ground now raised was bona fide and the same could not have been raised earlier for good reasons. In such cases, the raising of additional ground could be allowed. In this case, there is nothing on record to indicate as to what was the reason which prevented the appellant assessee from raising a claim for deduction under Section 80-IA of the Act for subject assessment year during the proceedings before the Assessing Officer and the CIT (A). Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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