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TMI Blog2019 (10) TMI 1191X X X X Extracts X X X X X X X X Extracts X X X X ..... which is to be compared and unless contemporaneous data as section 92D read with Rule 10 D (4), is not available for a relevant year, multiple year data should not be used. Treatment of royalty paid by assessee to its AE - HELD THAT:- It is observed that assessee has placed substantial evidence which was not before the authorities below. We are therefore inclined to set aside this issue back to Ld.TPO/AO, for determination of this issue in the light of these documents vis-a-vis the agreement entered into by assessee with its AE under which the royalty has been paid. - Set aside this issue back to Ld. TPO to verify the issue on basis of documents filed by assessee and to establish true nature of transaction regarding payment of royalty by assessee to its AE. Ld.TPO is directed to verify details and if necessary called for any further documents in order to establish the true nature of the transaction regarding the payment of royalties by assessee to its AE and consider the claim of assessee as per law. Deduction u/s 10 A - export turnover being unbilled revenue, which was yet to be billed - HELD THAT:- Before us assessee has not been able to establish that RBI extended time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R D ):- ₹ 1,78,23,332 3. Royalty Payment:- ₹ 9,90,11,636 Software Development Services 1.1 The learned TPO and the learned AO grossly erred in law and facts of the case in determining the ALP of the international transaction of the Appellant as and thereby making an adjustment of ₹ 31,36,792 towards software development services. 1.2 That on the facts and circumstances of the case, the learned TPO and the learned AO erred in rejecting the Transfer Pricing (`TP') documentation without appreciating the contentions, arguments, and evidentiary data .put forward by the Appellant during the course of the proceedings before them, and in doing so have grossly erred: 1.2.1. in adopting the arm's length mark up to be 23.12% in respect of international transactions of the Appellant. 1.2.2. in rejecting the upper limit for sales turnover filter proposed by the Assessee without providing any empirical analysis. In doing so, the learned TPO erred in not appreciating that the software industry is clearly demarcated based on size. 1.2.3. in not maintaining consistency in applying the filte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /PN/07 - Pune). 1.2.11. in accepting Tata Elxsi Limited as a comparable company even though the company in its reply to the learned TPO under section 133(6) had mentioned that the company provides product design services, which is functionally not comparable to the assessee's business; 1.2.12. in rejecting Thinksoft Global Services Limited by stating that it is not functionally comparable while ignoring the fact that Thinksoft Global Services Limited is engaged in software verification and validation services form an integral part of the software development services. 1.2.13. in concluding that Maars Software International Limited is not functionally comparable without even considering the fact that the IT consultancy services forms an integral part of the software development services and cannot be classified as functionally different from that of the Appellant. 2. Research Development 2.1 The learned TPO and learned AO grossly erred in law and facts of the case in determining the ALP of the international transaction of the appellant and thereby making an adjustment of ₹ 1,78,23,332 towards R D: se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the fact that the Appellant has claimed tax benefits under section 10 A of the Act and has no reason to suppress its profits from its operation to manipulate the transfer prices. Therefore the adjustment proposed is not called for and is hence misplaced. 4.4 That the learned TPO and the learned AO erred in concluding that the Appellant is exposed to single customer risk without evaluating the business arrangement of the Appellant. 4.5 That the learned TPO and the learned AO erred in not allowing the benefit of range of +/- 5% as provided in proviso to Section 92C(2) of the Act to the Appellant, while determining the arm's length price. B. Non-transfer pricing adjustments 5. Deduction under Section 10A to be allowed for unbilled revenue: ₹ 92,560,000 5.1 The learned AO/ DRP erred in re-computing the deduction under section 10A of the Act after reducing the unbilled revenue amount of ₹ 92,560,000/-from Export Turnover. 5.2 The learned AO/DRP failed to appreciate the fact that the export proceeds have been repatriated into India within the time period as prescribed by RBI in accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was incurred specifically for the delivery of software outside India. 7.3 The learned AO/ DRP ought to have observed that the communication expenses were incurred towards lease line expenses and not specifically for the delivery of software outside India. 7.4 Notwithstanding and without prejudice to .the above, should the communication expenses be reduced from the export turnover, such expenses should also be reduced from the total turnover while arriving at the deduction under section 10A of the Act. 7.5 The learned AO/ DRP erred in relying on a decision of Chennai Tribunal in the case of California Software Co Ltd. Vs ACT (118-TTJ-844) which was pronounced before the decision of Sak Soft Limited. 7.6 The learned AO/ DRP ought to have placed reliance on the decision of the Special Bench of the Chennai Tribunal in the case of Sak Soft Limited v. ITO (ITA No. 691 1953/Mds/2007) wherein it has been held that if the telecommunication, freight and insurance 'expenses are reduced from the export turnover then the same would also have to be reduced from the total turnover in order to compute the deduction under section 10A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se to which, representative of assessee appeared before Ld.AO and filed requisite details as called for. 2.2 Ld.AO observed that assessee has three 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 debited sum of ₹ 5,10,79,988/- 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, telecommunication charges, insurance attributable to the delivery of the articles or things or computer software outside India or expenses if any incurred in foreign exchange in providing technical services outside India. 2.3 Ld.AO accordingly disallowed sum of ₹ 27,91,365/- being 80% of quantified communication charges relating to software unit. 2.4 Ld.AO further observed that assessee claimed deduction under section 10 A being expenses towards donation amounting to ₹ 2,65,000/-. Ld. AO disallowed the sum by holding that eligibility of deduction under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty to its AE. From TP study, Ld.TPO observed that each of manufacturing subsidiaries of AE entered into non-exclusive license agreement with AE, for license of technology and trademark intangibles, for using manufacturing and royalty was payable on such revenues from sale of products in their local territories. Ld.TPO observed that assessee during year under consideration entered into similar exclusive license agreement with its AE, according to which royalty at 4.5 % was payable on domestic sale of manufactured products by assessee in local markets within India. It has been submitted that, it is the AE who owns all intellectual property rights, trademarks, patents, copyrights, 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. 2.6.1 Ld.TPO on perusal of submissions advanced by assessee concluded that assessee did not prove any tangible benefit derived by paying royalty for so-called superior technology and that any independent enterprise would like to pay royalty to access superio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A Techno Analytics Ltd., 15% Mindtree Consulting Ltd., 11% Computech International Ltd., 7% Karuturi Networks Ltd., 4% Average Mean 13% Mean 13% 2.7.1 Ld.TPO on examination of TP documentation filed by assessee was of opinion that assessee is mainly offshore research and development service provider and these services are akin to software development services. Ld.TPO accordingly rejected comparables selected by assessee and finalized 29 comparables with average margin of 27.96 % which are as under: Sl.No. Company Name OP to Total cost % 1 Accel Transmatic Ltd.(Seg.) 21.11% 2 Avani Comcon Technologies Ltd. 52.59% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24 SIP Technologies Exports Ltd., 13.90% 25 Tata Elxsi Ltd.(Seg.) 26.51% 26 Thirdware Solutions Ltd. 25.12% 27 TVS Infotech Ltd., 11.61% 28 Wipro Ltd. (SEg.) 33.65% 27.96% Ld.TPO thus proposed adjustment under this segment amounting to ₹ 31,36,297/-. 2.8 Ld.TPO observed that assessee undertook research and development services during year. Arms length price of international transaction representing research and development services was determined by applying TNMM as most appropriate method and OP/TC as PLI. Assessee computed its margin at 10% on cost and average margin of 3 comparables were determined at 7% in TP study report. Assessee thus held that the transaction was within +/5% of the price char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment segment was made at rupees would ₹ 1,78,23,332/- disallowance of Royalty amounting to ₹ 9,90,11,636/-. deduction claimed by assessee under section 10 A of the Act, was restricted to ₹ 27,91,365/-, being 80% of expenses claimed. Donation paid amounting to ₹ 2,65,000/- claimed as deduction under section 10 A 4. Aggrieved by order passed by Ld.AO, assessee is in appeal before us now. 4.1 Ld.AR submitted that Ground No. 1.1 and 1.2 are general in nature, and therefore do not require any adjustment. 4.2 Ld.AR further submitted that Ground No. 1.2.1-1.2.5 are to not pressed. Accordingly these grounds are dismissed as not pressed. 5. Assessee has raised additional ground vide application dated 03/03/2016, seeking exclusion of Thirdware Solutions Ltd., being Ground No. 1.2.14 which is as under: Additional Ground: No.1.2.14- Thirdware Solutions Ltd., (Thirdware) should be rejected as a comparable for the technical service segment. The appellant submits that the ld.TPO has erred in including Thirdware as a functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have perused details relied upon by both sides In our considered opinion comparables alleged in additional ground arises out of records and was objected before DRP for its exclusion/inclusion. Considering inadvertent mistake on behalf of assessee in raising these grounds before this Tribunal, we allow additional ground raised now. Accordingly additional ground no.1.2.14 in application dated 03/03/2016 stands allowed. 6. Ground No. 1.2.6 -1.2.11 has been raised by assessee challenging addition made by Ld.AO on account of arms length price computed for software design and development service segment being technical support services provided by assessee to its AE s. Ld.AR submitted that only issue disputed by assessee is in respect of comparables selected by Ld.TPO. Primary, allegations regarding comparables on the ground of functional dissimilarity with assessee and does not fulfill filters applied by Ld.TPO himself. 6.1 Ld.AR submitted that following comparables have been objected by assessee for inclusion: Accel Transmatic Ltd. (Seg.) Avani Cimcom Technologies Ltd. Celestial L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ledge 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 company-wide internal use software infrastructure. Billing and collection APC India is responsible for raising invoices and their subsequent collection. 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: It is submitted that, as assessee is a captive service provider and is compensated at cost +10%, it does not bear any risks like market risk, financial risk, credit and collection risk and service liability risk. Only risk that would be assumed by assessee is in terms of foreign exchange risk as revenue received by assessee is in foreign exchange. 6.4 Thus, assessee has been categorized as a routine servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar with that of assessee. He further submitted that this comparable has sold its intellectual property rights in Prodigy and receives royalties on sale of software. Ld.AR thus submitted that the segment applied by Ld.TPO itself is not identical with that of assessee. Ld. CIT DR placed reliance upon the observations of authorities below and prayed for its inclusion. 10. We have perused submissions advanced by both sides in the light of records placed before us. It is observed that Ld.TPO used segmental information in respect of products of this comparable. However, from various products developed by this comparable, it is observed that, they are not into contract software development, which is the case of assessee, developing software for its AE only, for which assessee is remunerated on cost +10% markup. Further that in the process of software development, in the event any intangibles are created, the same is exclusively owned 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able. It was observed by this Tribunal in case of Telcordia Technologies Pvt. Ltd. v. ACIT(supra ) that margin of this company is 52.59% which represents abnormal circumstances and profits. Following figures were relied by Ld.AR, as observed by coordinate bench of this Tribunal in case of First Advantage Offshore Services Pvt.Ltd. Vs DCIT(supra):- Particulars 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Exports 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the above, the Assessee pointed out from annual report highlighting the fact that, this company is into developing biotechnology products and provides related software development services, without any segmental details. There is no detail regarding nature of software development services performed by this company. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which business of this company was explained as to clinical research. We are of the view that in light of submissions made by Ld.AR and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which it could be held that this company is mainly in the business of providing software development services. We therefore direct Ld.TPO to exclude this company from final list. 8.2.5 E-Zest Solutions Ltd: This company has been selected by Ld.TPO and objected by assessee on the ground that, it was functionally different from assessee. Ld.TPO rejected contentions of assessee on the basis of information received in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from set of comparables for period under consideration We therefore direct Ld.TPO to exclude this company from final list. 8.2.6. Flextronics Software Ltd.(Seg.) This comparable has been selected by Ld.TPO in final list and objected by assessee due to non availability of reliable financial data for year under consideration. He submitted that Ld.TPO obtained information us/ 133(6), which is contrary to annual report and therefore is not reliable It has been submitted that the annual report is for year ending 31.03.2007 for a period of nine months and Ld.TPO whithout reconciliation between annual report and information received u/s.133(6) considered in the final list. In support of, he placed reliance on decision of co-ordinate bench of this Tribunal in case of Hewlett Packard (I) Ltd Vs.DCIT in ITA no. 1031/Bang/2011. On the contrary, Ld.DR supported the inclusion of this company in the list of comparables by the TPO. We have heard rival submissions and perused and carefully considered material on record. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record. It is observed that this company has substantial revenues from software products and break-up of software product revenues is not available. This company has incurred huge research and development expenditure to the tune of approximately ₹ 200 Crores. Ld.AR placed reliance on the following judicial decisions :- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) We find that assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from assessee and hence is not comparable and finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. The argument put forth by assessee's is that this company has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it does not satisfy 25% employee cost filter and thus has to be excluded. He placed reliance on decision of coordinate bench of this Tribunal in case of First Advantage Offshore Services Pvt. Ltd. V DCIT in IT(TP)A No.1086/Bang/2011 for AY: 2007-08, wherein it has been held that this company is not comparable in case of software development services provider. On the contrary, Ld.DR supported the inclusion of this company in the list of comparables by the TPO. We have heard the rival submissions and perused and carefully considered material on record. Respectfully following the decision of the tribunal referred to above, we direct the AO/TPO to exclude this company from final list of comparable. 8.2.10. KALS Information Systems Ltd It has been contended that this company has revenues from both software development and software products. It is also pointed out that this company is engaged in providing training and that as per the annual repot, salary cost debited under software development expenditure was ₹ 45,93,351/- which is less than 25% of software services revenue and therefore fails in salary cost f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It has been submitted that this comparable has been included by Ld.TPO. Ld.AR submitted that the information collected by Ld.TPO is by issuing notice under section 133 (6) of the act. He has further submitted that information so paid by Ld. TPO varies with that of the information that is available on the public domain. He submitted that under such circumstances these comparable should be excluded as there is no clarity regarding the functions performed, the assets owned and the risks assumed by this comparable. Ld. CIT DR though supported the observations of authorities below could not controvert therefore stated submissions advanced by Ld.AR. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that at page 386 of paper book volume 1 and page 3040 of paper book volume 5 details regarding the activities carried out by this comparable has been placed. And we observe that there 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 thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this Tribunal while deciding the case of Hewlett-Packard (India) Global Soft Pvt.Ltd (supra) held this comparable to be excluded since this company has a different year ending. Assessee has submitted this comparable to be into IT related and BPO services. However on perusal of annual report placed at page 831-994 of paper book volume- 2, we observe that this comparable has income from software development and customization services and to a lesser extent from BPO services. It has been submitted that this comparable derives its revenue from 2 segments and has provided segmental information at page 888 of paper book. Under such circumstances, merely because comparable has a different year ending, cannot lead to the conclusion, of it being non-comparable with that of assessee. In the event quarterly results are available and the same can be extrapolated, this comparable should be considered. We therefore, set aside R Systems International Ltd., which is functionally similar, to Ld. AO/TPO to consider the quarterly report and extrapolate the same for purposes of comparing its margin with assessee. Accordingly, we set aside this comparable to Ld.TPO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the same the issue may be set aside to Ld.TPO. 35. We have perused the order passed by this Tribunal in assessee s own case for assessment year 2009-10 (supra) and observed that the issue has been decided by observing as under: RESEARCH AND DEVELOPMENT SERVICES SEGMENT: 14. As far as determination of ALP in this segment is concerned, the disputes raised by the Assessee are that the nature of services rendered by the Assessee to its AE was SWD services and it is not correct to characterize the same as R D Services. Though this was the basis on which the TP study was undertaken by the Assessee, the Assessee submits that there is no estoppels in the matter of determination of ALP. The learned counsel in this regard has also pointed out that the TPO in AY 10-11 2011-12 accepted the claim of the Assessee in this regard and the relevant order's of TPO was also placed before us. The other grievance projected by the Assessee is that even assuming that the Assessee is to be regarded as rendering R D services to its AE, the comparable companies chosen by the TPO and retained by the DRP are not comparable functionally and otherwise. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble companies chosen on that basis are left open for consideration de novo by the TPO in the set aside proceedings. Respectfully following the same, we direct Ld.TPO to compute ALP as directed hereinabove. Accordingly these grounds raised by assessee stands allowed for statistical purposes. 10. Ground No.3.1- 3.7 is in respect of the treatment of royalty paid by assessee to its AE by the authorities below. 10.1 The contentions raised by assessee is that assessee in its manufacturing activity uses various marketing intangibles, technology intangibles, process manuals and standards, quality standards etc which is owned by its AE-UK. It has been submitted that assessee also has access to subsequent product improvements and development through the licensing agreement which is significant benefit received by assessee which enables assessee to update the technological development in the market. He submitted that the license agreement entered into by assessee with its AE for use of these technologies in the manufacturing of products also grants assessee license to sell such manufactured products in India in domestic market. Ld.AR fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO/AO, for determination of this issue in the light of these documents vis-a-vis the agreement entered into by assessee with its AE under which the royalty has been paid. It has been observed that for assessment year 2006-07 in assessee s own case in ITA No. 1415/be a NG/2010 vide order dated 07/06/19, the issue has been set aside on the basis of additional evidence filed by assessee for verification of the same. Respectfully following the same we are also inclined to set aside this issue back to Ld. TPO to verify the issue on basis of documents filed by assessee and to establish true nature of transaction regarding payment of royalty by assessee to its AE. Ld.TPO is directed to verify details and if necessary called for any further documents in order to establish the true nature of the transaction regarding the payment of royalties by assessee to its AE and consider the claim of assessee as per law. Accordingly these grounds raised by assessee stands allowed for statistical purposes. 11. Ground No. 4 has been not pressed by Ld.AR. Accordingly this ground stands dismissed as not pressed. 12. Grounds 5.1-5.7 It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ines satisfy requirements of section 10 A (3). Further Section 10A (3) provides that competent authority being RBI can grant extension of time to receive unbilled amounts by assessee pertaining to a particular year. 40.1 Before us assessee has not been able to establish that RBI extended time period to receive income arising out of export of services declared during the year under consideration. In decisions relied upon by Ld.AR in case of Tech Mahindra R D Services Ltd (supra), assessee therein received income within 6 months of invoice being raised and therefore this Tribunal held that revenue should be included in export turnover and also the total turnover. In the facts of present case, assessee raised invoice in March 2008 that is end of subsequent financial year, for which assessee do not have any permission from RBI regarding extension of time. We are therefore unable to concur with the argument advanced by Ld.AR. Accordingly this ground raised by assessee stands dismissed. 13. Ground no.6 This ground has been raised by assessee against disallowance of expenditure towards royalty under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e activities, where all manufacturing units of the company was situated. Assessee had two manufacturing units which claimed deduction under section 10A. It was submitted that if any disallowance was to be made it should have been made in respect of units as per the segmental financial statement filed by assessee. Ld.AR placed reliance upon decision of Hon ble Bombay High Court in case of CIT vs Gem Plus Jewellery India Ltd., reported in (2011) 194 Taxmann 192 where it was held that exemption under section 10A had to be granted on enhanced income. The alternative plea thus raised by assessee was that consequential benefit under section 10A should be allowed if such disallowance is to be made. Ld. DR submitted that the issue requires verification by Ld.AO. We have perused submissions advanced by both sides in light of records placed before us. It is observed that Ld.AO and DRP upheld disallowance for want of evidence. Assessee is directed to file all requisite details and Ld.AO is directed to verify the same and consider the claim as per law. Accordingly this ground raised by assessee stands allowed for statistical ..... X X X X Extracts X X X X X X X X Extracts X X X X
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