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TMI Blog2019 (2) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... ins declared by assessee in its transactions with its associated enterprises should be accepted as the said margins are higher than the margins of selected comparables. Where the TPO himself has considered the cost incurred on sales & marketing, delivery services and client care cost centres to be attributable to distribution segment and where the assessee had re-charged cost with 18% markup to its associated enterprises, then cost plus revenue related to the aforesaid cost should also be attributed to the distribution segment. It is not disputed that the TPO had accepted the assessee’s segmental bifurcation to arrive at TP adjustments. The cost allocated to software distribution segment had neither been challenged nor been disturbed by TPO, wherein the operating cost used by the TPO for margin computation of software distribution segment matches the total expenses in Row AA, column 2, matches operating cost used by TPO for margin computation of software distribution segment. Accordingly, no adjustment is warranted in the hands of assessee under the head ‘software distribution segment’. The arm's length price of software development segment is thus accepted to be at arm's length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y assessee and Revenue. 4. The assessee in ITA No.581/PUN/2016, relating to assessment year 2011-12 has raised the following grounds of appeal:- 1. Ground No. 1 - The AO, acting under Directions issued by the DRP, erred in making an addition of ₹ 15,918,919 to the Appellant's total income based on the provisions of Chapter X of the Act and inappropriately not considering the approach adopted in the Transfer Pricing Documentation. 2. Ground No. 2 - The AO, acting under Directions issued by the DRP, has erred in incorrectly holding that service revenue of ₹ 42,902,028 is not attributable to the Software Distribution segment of the Appellant, and attributing it to the Software Development segment instead. 2.1. The DRP has erred in holding that no service revenue from the Associated Enterprise ('AE') of the Appellant is attributable to the Appellant's Sales Marketing and Delivery Services cost centres. 2.2. The DRP has erred in attributing only ₹ 3,926,163 of service revenue to the Client Care cost centre of the Appellant. 3. Ground No. 3 - The AO, acting under Directions issued by the DRP, has erred in attributing to the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for scrutiny. The Assessing Officer made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) to compute the arm's length price of international transactions entered into by the assessee with its associated enterprises. The TPO noted that the assessee was a subsidiary of Triple Point US and was engaged in providing software development services to its associated enterprises. The assessee was also engaged in sale of software license to the Indian customers, providing software implementation related services to Triple Point US in Asia region and providing help-desk services and Annual Subscription Services. Various international transactions were undertaken by the assessee totaling ₹ 43,09,13,598/- are tabulated at page 1 of the TPO s order. He further noted from the TP study report that along with revenue from software development and related services, the assessee was also having associated enterprise transactions pertaining to software distribution segment. The PLI in distribution segment was 29.04%. However, against the revenue from software distribution, the assessee had apportioned revenue of ₹ 4,68,28,191/-. The assessee pointed ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to various clauses of said agreement and also perused the copy of invoice raised on associated enterprise and noted that copy of invoice produced only refers to software development services and in view thereof, PLI of assessee in software distribution segment was computed at (-) 24.40%. However, the main PLI of comparables on GP/Sales worked out to 1.54%. In view thereof, arm's length price of assessee in software distribution was worked out and an upward adjustment of ₹ 2,04,25,144/- was proposed by the TPO. The Assessing Officer passed draft assessment order, against which the assessee filed objections before the Dispute Resolution Panel (DRP), which in turn, remitted the issue back to the file of Assessing Officer / TPO for re-computing the adjustment considering correct average margins of comparable companies. The TO re-computed the TP adjustment on the basis of DRP directions and arrived the TP adjustment at ₹ 1,59,18,919/-. The Assessing Officer in final assessment order made the aforesaid addition of ₹ 1,59,18,919/- 8. The assessee is in appeal against the order/s of Assessing Officer/TPO/DRP. 9. The learned Authorized Representative for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices and Sales Marketing cost centres pertaining to Software Distribution Segment, along with 18% markup as provided in the Services Agreement. The assessee has furnished tabulated details in this regard and has taken us through the said details. The learned Authorized Representative for the assessee pointed out that the DRP had held that entirety of the cost incurred in Sales Marketing and Delivery Services cost centres and 80% of cost in Client Care centre were attributable to assessee s obligation under its License Agreement and therefore, not entitled to cost plus markup. The DRP held that only 20% of cost of Client Care cost centre was attributable to its obligation under the License Agreement and then only that portion was to be remunerated on the basis of cost plus 18% markup. In this regard, the learned Authorized Representative for the assessee first referred to the definition of Services and also pointed out that the assessee and its associated enterprise were interpreting the Services Agreement to require the recharging of cost of Sales Marketing, Client Care and Delivery Services cost centres to associated enterprises with 18% markup in the same way in assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted. 11. The learned Departmental Representative for the Revenue in this regard placing reliance on the order of DRP with special reference to paras 2.11 to 2.28 pointed out that controversy in this regard was vis- -vis allotment of revenue to Distribution Segment totaling ₹ 4.68 crores. 12. The learned Authorized Representative for the assessee in rejoinder pointed out that DRP in para 2.15 at page 15 agrees that Sales Marketing, Delivery Services and Client Care cost centres had some link with distribution. He further placed reliance on the order of Pune Bench of Tribunal in Haworth (India) Pvt. Ltd. Vs. DCIT in ITA No.281/PUN/2014, relating to assessment year 2009-10, order dated 30.10.2017. 13. We have heard the rival contentions and perused the record. The assessee was engaged in providing software development services to its associated enterprises and was also providing software distribution services to its associated enterprises. The TPO has accepted the margins of software development services. However, in respect of software distribution services, wherein the assessee was providing services to its associated enterprises on account of sales and mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent need not be disturbed and the margins declared by assessee in its transactions with its associated enterprises should be accepted as the said margins are higher than the margins of selected comparables. 14. Before parting, we may also refer to the order of Tribunal in Haworth (India) Pvt. Ltd. Vs. DCIT (supra), wherein also similar cost allocation was made and there was segregation of activities and the assessee was being remunerated at cost plus markup of 10%. In the facts of the said case, earlier the assessee was remunerated by way of commission @ 15%. However, the said methodology had undergone change, wherein the assessee was receiving cost plus margins from its associated enterprises. So, the question was whether merely because the assessee was receiving cost plus markup as against commission being received, it would not change the nature of activities/services carried on by the assessee. Accordingly, we hold that where the assessee had consistently from year to year followed a methodology of segregating cost of centres of sales marketing, delivery services and client care and clubbing the same under the head software distribution segment , which in turn, were re-ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ground of appeal No.2 raised by Revenue does not survive. 17. Now, coming to the issue raised vide ground of appeal No.1. The perusal of order of DRP vis- -vis objection No.3 i.e. rejection of Nouveau Global Ventures was that the TPO had rejected the said concern as it was loss making company. The findings of DRP in para 3.3 at page 20 had held that the finding of Tribunal is that the concern could not be rejected merely on account of having loss situation in the current year. Hence, the DRP directed the Assessing Officer / TPO to include the company Nouveau Global Ventures in the set of final comparable companies. This is the only direction given by DRP in respect of any of the comparables. The concern was excluded as it had losses in the said year but it was not persistent loss making concern and hence, we find no error in the directions of DRP to include the said concern in final set of comparables. The ground of appeal No.1 raised by Revenue is thus, dismissed. 18. Now, coming to the appeal of assessee in assessment year 2012-13. 19. The ground of appeal No.1 in assessment year 2012-13 raised by assessee is general in nature and hence, the same is dismissed. 20. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms Pvt. Ltd. has been rejected as being functionally not comparable. Another issue is that there is an extraordinary event during the year. Accordingly, we hold that Infobeans Systems Pvt. Ltd. is to be excluded from final set of comparables while benchmarking arm's length price of software development services undertaken by the assessee. 25. Now, coming to the next concern Persistent Systems Ltd. The said concern was also engaged in outsource software product development, wherein in the annual report itself it has been provided that revenue licensing of product is recognized on delivery of products. 26. The Bangalore Bench of Tribunal in 3DPLM Software Solutions Ltd. Vs. DCIT in IT(TP)A No.1303/Bang/2012, relating to assessment year 2008-09, order dated 28.11.2013 have held that the concern Persistent Systems Ltd. company is to be omitted from final set of comparables as it was engaged in product development and product design, whereas the assessee was in software development services. Following the same, we direct exclusion of Persistent Systems Ltd. from final set of comparables. 27. The next concern is Cybercom Datamatics Information Solutions Ltd., which is also n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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