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TMI Blog2019 (6) TMI 1407X X X X Extracts X X X X X X X X Extracts X X X X ..... as per law. Comparable selection - functional similarity - HELD THAT:- Assessee is mainly into offshore research and development service provider and these services are akin to software development services. Comparibility is to be carried out on broad object of benchmarking international transaction and according to the law laid down under section 92B of the Act, read with rule 10 B (2) Income tax Rules, 1963. Comparables must be similar in material aspects and must be compared on the basis of the products/services characteristics, functions undertaken, assets used and risk assumed. Merely because certain comparables has been upheld for its exclusion/inclusion by various decisions, does not ipso facto lead to exclusion/inclusion in a given set of facts. In our considered opinion, exclusion/inclusion of any comparables must be strictly analysed on basis of FAR, in accordance with rule 10 B (2). We also are of opinion that comparables selected must be for the relevant year which is to be compared and unless contemporaneous data as section 92D read with Rule 10 D (4), is not available for the relevant year, multiple year data should not be used. Infosys technologies Ltd - This compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by AE. As we have already analyse the functions and the risks assumed, it is observed that assessee do not even undertake the pricing risk as the prices are decided by its AE only. Under such circumstances we do not find it functionally similar even though taking the segmental details of sale of products as there is a huge difference in the products sold by this comparable with that of assessee - direct Ld.TPO to exclude this comparable from the final list. Megasoft Ltd - This comparable should not be used as there exists contradictions in the details available on public domain vis-a-vis the information gathered by Ld.TPO under section 133 (6). Deduction u/s 10A - exclusion of telecommunication expenses while computing deduction - HELD THAT:- Hon ble Karnataka High Court in case of CIT vs Tata Elxsi Ltd [ 2011 (8) TMI 782 - KARNATAKA HIGH COURT] on identical issue held that telecommunication expenses is to be included while computing deduction under section 10 A of the act as it is directly linked with earning of income. Ld CIT DR has not brought before us any contradictory/distinguishable facts in respect of present case before us. Respectfully following above we direct Ld.AO t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s length price of payment of license fee to be NIL, and in doing so grossly erred in; 6.1. concluding that the Appellant has not received any tangible economic benefit. 6.2. did not appreciate the fact that the Appellant is a licensed manufacturer in India and is entirely dependent on the associated enterprise for the related technical know-how, expertise, etc. 6.3 concluding that no supporting evidence were furnished to justify the payment of license fee; 6.4 erred in ignoring the fact that the Appellant had used Comparable Uncontrollable Price (CUP') Method to benchmark the transaction. 7. Learned AO and the Learned Panel erred in ignoring the fact that the Learned TPO has transgressed the powers provided u/s 92CA of the Act. B) Provision of Technical Support Services (Software Development): 8. That on the facts and in the circumstances of the case the Learned AO/ the Learned TPO and the Learned Panel erred in making adjustment in arm's length price of the Appellant's international transactions with related parties by ₹ 7,078.623/- (pertaining to software development services). 9. That on the facts and circumstances of the case. the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any adjustment in export turnover. 13. The Learned AO failed to appreciate and ought to have held that the deduction under section 10A of the Act is granted on the proportion which export turnover bears to total turnover of the undertaking. corresponding effect of reduction of various expenses from export turnover would have to be given to total turnover to achieve uniformity between the export turnover and total turnover. 14. Consequently, the Learned AO erred in charging interest under section 234B of the Act. 15. Consequently. the Learned AO erred in charging interest under section 234D of the Act. 16. That the Appellant craves leave to add to and / or to alter. amend. rescind. modify. the grounds herein above or produce further documents before or at the time of hearing of this Appeal." Additional Grounds of appeal: "Transfer Pricing-Additional Ground of Appeal It is most humbly prayed to the Hon'ble Tribunal to permit the Appellant to raise the following additional grounds of appeal in continuation to the existing revised grounds of appeal and this additional ground be read as Ground No. 10.4.1 to 10.4.11 Ground No. 10.4.1: Aztec Software Ltd ('A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006-07 Ground No. 10.4.5: R Systems International Limited ("R Systems") should be rejected as a comparable The Appellant submits that the Ld. TPO has erred in including 'R Systems' as functionally comparable company to the Appellant, while doing the comparability analysis. The Appellant submits that R Systems is not comparable to the Appellant for the following reasons: * It is functionally not comparable * It is engaged in brand building * It has different financial year ending Ground No. 10.4.6: Tata Elxsi Limited ('Tata Elxsi') should be rejected as a comparable: The Appellant submits that the Ld. TPO has erred in including 'Tata Elxsi' as functionally comparable company to the Appellant, while doing the comparability analysis. The Appellant submits that Tata Elxsi is not comparable to the Appellant for the following reasons: * It is engaged in product design and engineering services; and * It is engaged in Research & Development activity resulting into creation of Intellectual Property Rights Ground No. 10.4.7: Lucid Software ('Lucid') should be rejected as a comparable: The Appellant submits that the Ld. TPO has e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable to the Appellant for the following reasons: * The annual accounts of the Flextronics is of fifteen months and thus incomparable * It is engaged in sale of products * It is engaged in Research & Development activity and creates Intellectual Property rights * It has made strategic acquisitions during the year" 2. Brief facts of the case are as under: Assessee filed its return of income for year under consideration on 13/11/06 declaring income of ₹ 22,98,86,248/-. The same was processed under section 143 (2) and statutory notices was subsequently issued to assessee, in response to which, representative of assessee appeared before Ld.AO and filed requisite details as called for. 3. Ld.AO observed that assessee has 3 units, enjoying benefit of section 10 A known as EHTP Units-I and II and Software unit, besides a domestic unit. It was observed by Ld.AO that assessee had debited an amount of ₹ 44,31,074/-towards communication charges, which formed part of deduction claimed under section 10A. Ld.AO was of opinion that, as per Clause (iv) of Explanation 2 to Section 10A, export turnover for purposes of claiming deduction, does not include fright, teleco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opyrights, trade secrets, confidential business information, inventions, discoveries and know-how is, manufacturing and product processes and techniques, research and development information, copyrightable works and all other proprietary rights. 8. Ld.TPO on perusal of submissions advances by assessee concluded that assessee did not prove any tangible benefit derived by paying royalty for the so-called superior technology and that any independent enterprise would like to pay royalty for to access superior technology, only if the same results in either reduction of cost or improved profitability. It was therefore concluded by Ld.TPO that in the instant case, loss incurred in domestic segment was mainly due to payment of royalty, which otherwise would not be paid between two independent enterprises, dealing at arms length. 9. Ld.TPO thus determined ALP of royalty as 'nil". He thus proposed adjustment of ₹ 6,92,64,977/- as value of these transaction in uncontrolled conditions. 10. Software development services Ld.TPO observed that during the year assessee rendered technical support services to its AE's, against which revenue amounting to ₹ 7,30,12,000/-was received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selected 7 comparables. In the finalist of comparables by Ld.TPO there were other comparables, with an average margin of 20.68% which were included as under: Sl. No. Company Name Unadjusted Margins FY 2005-06 1 Aztec Software Ltd 18.09% 2 Geometric Software Limited (Segment) 6.70% 3 iGate Global Solutions Ltd (Segment) 15.61% 4 Infosys Limited 40.38% 5 KALS Information Systems Limited (Segment) 39.75% 6 Mindtree Consulting Limited 14.67% 7 Persistent Systems Limited 24.67% 8 R Systems International Limited (Segment) 22.20% 9 Sasken Communications Limited (Segment) 13.90% 10 Tata Elxsi Limited (Segment) 27.65% 11 Lucid Software Limited 8.92% 12 Mediasoft Solutions Private Limited 6.29% 13 R S Software (India) Ltd 15.69% 14 SIP Technologies & Exports Limited 3.06% 15 Bodhtree Consulting Ltd 15.99% 16 Accel Transmatics Ltd (Segment) 44.07% 17 Synfosys Business Solutions Ltd 10.61% 18 Megasoft Ltd 52.74% 19 Lanco Global Solutions Ltd 5.27% 20 Flextronics Software Systems Ltd (Segment) 27.24% Arithmetic mean 20.68% 12. Ld.TPO thus proposed adjustment under this segment amounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit derived from AE for which royalty has been paid by assessee. Referring to pages 323-367 of paper book, Ld.AR submitted that additional evidences has been placed which includes documents to establish that assessee is a licensed manufacturer, that products manufactured by assessee cannot be carried out without technological and R & D assistance from its AE, details establishing actual receipt of technical knowhow from its AE, against which royalty has been paid, details to prove that IPRs and know-how received from AE are confidential property of AE being guidelines, directions, screenshots etc, that helps assessee to manufacture the products. It has been submitted that these documents were not placed before authorities below and therefore requires consideration. Ld.CIT DR supported Ld.AR, that based upon these documents, the issue needs to be reconsidered for establishing actual nature of payments made by assessee. 20. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that assessee placed substantial evidence which was not before the authorities below for consideration. We are therefore inclined to set aside th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernal and external training to its employees. These training programs could be organized either in the US or in India. Design and software development APC India does not develop software products for sale in open market. It caters to the specific needs of APCC US and its associated enterprises worldwide that help exploiting new opportunities by harnessing knowledge of business processes with proven skills in applying technology. Technical support and maintenance activity APC India provides internal technical support services which includes creating, maintaining or enhancing APC companywide internal use software infrastructure. Billing and collection APC India is responsible for raising invoices and their subsequent collection. 26. Assets Owned: It has been submitted in TP study that, assessee does not own any significant intangible assets. It only has technical manpower employed and trained by company being most important assets along with furniture fixtures computer peripherals etc. Risks assumed Market Risk With respect to risks associated with success or failure, the entire technical support services of APC India are driven based on the specificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rictly analysed on basis of FAR, in accordance with rule 10 B (2). We also are of opinion that comparables selected must be for the relevant year which is to be compared and unless contemporaneous data as section 92D read with Rule 10 D (4), is not available for the relevant year, multiple year data should not be used. With aforestated understanding, let us analyse comparables alleged to be excluded by assessee before us. 28. Based upon above FAR analysis, we shall now undertake compatibility tests of assessee with comparables under objection for inclusion. 29. At the outset, Ld.AR submits that for year under consideration, in the event, following comparables are considered for exclusion, assessee would be within acceptable arms length margin. Infosys technologies Ltd KALS Information Systems Ltd Tata Elxi Ltd Allsec transmatic Ltd Megasoft limited 30. In respect of remaining comparables, Ld.AR submitted that liberty may be granted to argue their exclusion in appropriate circumstances. 31. Infosys technologies Ltd It has been submitted that this comparable has been included by Ld.TPO, and is functionally different with that of assessee. He submitted that thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td (Seg.): It has been submitted that this comparable has been included by Ld.TPO, even though it is functionally not similar with that of assessee. Ld.AR submitted that this company is engaged in research and development activities which results in creation of intellectual property rights. Ld. CIT DR supported observations of authorities below and prayed for its inclusion. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that this comparable caters basically in providing software development services wherein, huge intangibles are generated owned by this comparable. It is also observed that this comparable is a group concern of TATA, which makes it to be economically different with that of assessee's who undertakes limited risks and provides technical assistance to its AE's in products developed for AE. We do not find this comparable to be functionally similar in any manner whatsoever with that of assessee. Accordingly we direct this comparable to be excluded from the final list. 35. Accel Transmatic Ltd (Seg.): It has been submitted that this comparable has been included by Ld.TPO even though this functionally di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is contradictions in the facts mentioned in the audited financial reports and annual reports vis-a-vis the information collected by Ld.TPO under section 133 (6). We are therefore of considered opinion that this comparable should not be used as there exists contradictions in the details available on public domain vis-a-vis the information gathered by Ld.TPO under section 133 (6). 38. Accordingly, we direct Ld.TPO to exclude this comparable from the final list. 39. We also mention that, not considering of other comparables alledged by assessee does not ipso fact lead to upholding their inclusion, as with exclusion of comparables considered herein above, assessee falls into +/- 5% range. However, we grant liberty to assesse to allege other comparables, not considered by us in an appropriate instance. 40. Accordingly we allow Ground no.8-10 along with additional grounds raised in respect of comparables discussed herein above. 41. Grounds 11-13 These grounds has been raised by assessee, is in respect of exclusion of telecommunication expenses while computing deduction under section 10 A of the act upheld by Ld. CIT (A). Ld.AR placed reliance upon the decision of Hon'ble Kar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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