9911796707
TMI Blog2020 (5) TMI 235X X X X Extracts X X X X X X X X Extracts X X X X ..... hether the Hon'ble DRP is right in applying "onsite revenue filter" without appreciating the fact that the function carried out is "Software Development" irrespective of whether onsite or offshore. iv) Whether the Hon'ble DRP in correct in excluding M/s RS Software Pvt. Ltd. and M/s Acropetal Technologies and M/s L&T Infotech ltd on the ground that they have significant onsite revenue without appreciating the fact that onsite development of software entails more cost and thereby results in lower profit margins. v) Whether the Hon'ble DRP was right in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies. vi) Whether the Hon'ble DRP has erred on fact in deleting M/s Einfochips as a comparable on the ground that it fails the filter of service income less than 75% of the sales, when the said company has service income being 100% of the sales. vii) Whether Hon'ble DRP erred in fact in rejecting the company as a comparable on the ground that it is functionally different when the primary source of income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;ble DRP erred in applying related party filter of 25% without giving any cogent reason for doing so. 8. The learned AO/learned TPO/Hon'ble DRP erred in not applying the upper limit on turnover while selecting the comparable companies, even while applying the lower limit on turnover. 9. The learned AO/learned TPO/Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies. 10. The learned AO/learned TPO/Hon'ble DRP erred in not considering the provision for bad and doubtful debts as operating in nature. 11.The learned AO/learned TPO/Hon'ble DRP erred in applying onsite filter to reject the companies that are comparable to the Appellant. 12. Software Development Services 12.1. The learned AO/learned TPO/Hon'ble DRP erred in carrying out a fresh search to select comparables without appreciating the fact that the following comparable companies are not comparable to the Appellant: * Persistent Systems & Solutions Ltd. * Persistent Systems Ltd. * Sasken Communication Technologies Ltd. 12.2. The learned AO/learned TPO/Hon'ble DRP has grossly erred in rejecting companies that ought to have been inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng cash and cash equivalents, bank deposits etc. 15.4. The learned AO and the Hon'ble DRP ought to have appreciated that there is no separate cash ledger and bank accounts maintained for wireless division and the same are maintained at entity level. 15.5. The learned AO and the Hon'ble DRP has failed to appreciate that there are no intangible assets nor any secured/unsecured loans. 15.6. The Learned AO and the Hon'ble DRP has failed to appreciate that the law does not require that all assets are required to be transferred and only a collection of assets and liabilities which constitute a separate business activity and allows the buyer to carry out business independently would suffice. 15.7. The learned AO and the Hon'ble DRP has further erred in not observing that not only depreciable assets are transferred but also infrastructure, computers, employees and contracts (customer contracts, lease agreements and technical employees) together constitutes the business entity and the same has been transferred as a going concern. 15.8. The learned AO and the Hon'ble DRP has erred in placing reliance on the ruling of the Mumbai Tribunal in the case of Premier Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained by the Appellant. 15.18. The learned AO and the Hon'ble DRP has erred in holding that the leasehold improvements and computers older than 2 years would not have any value as on date of the transfer. 15.19. The learned AO and the Hon'ble DRP has further erred in holding that the valuation report is on 'as-is-where-is' basis. 15.20. The learned AO and the Hon'ble DRP has erred in not including the values of excluded assets (which are not part of valuation report) for the purposes of net worth computation. 15.21. The learned AO and the Hon'ble DRP has erred in holding that the agreement is made in terms of tax planning without appreciating the fact that the transaction was entered into between two independent and unrelated parties. C. Treatment of gains as short term capital gains 15.22. The learned AO and the Hon'ble DRP has erred in treating the transfer of wireless division as short term capital gains as most of the assets are held for less than 2 years. 15.23. The learned AO and the Hon'ble DRP has erred in treating the capital gains as short term as the assets held are depreciable assets whereas the Assessee has transferred asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed on the returned income and not on the assessed income. The Appellant craves to leave to add, to alter, to amend, to rescind or to modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing this appeal. For the above and any other grounds which may be raised at the time of earning, it is prayed that necessary relief may be provided. Brief facts of the case are as under: 2. Assessee is a company engaged in the business of software development activities relating to electronic integrated circuits and form where development circuits and marketing support services. For year under consideration assessee filed its return of income on 29/11/2011 declaring total income of Rs. 1,03,26,22,425/-. The return was processed under section 143(1) of the Act, and subsequently, case was selected for scrutiny. Notice under section 143 (2) was 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 entered into international transaction exceeding Rs. 15 crores and accordingly, case was referred to Transfer Pricing officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Technologies Ltd.(seg) 31.98% 2 e zest solutions 21.03% 3 E-infochips Ltd 56.44% 4 Evoke 8.11% 5 ICRA Techno Analytics Ltd. 24.83% 6 Infosys Ltd 43.39% Marketing support service segment S.No Name of the Company OP/Cost(%) 1 Aasian Business Exhibition & Conferences 19.51 2 Cyber Media Research Ltd 10.59 3 ICC International 24.66 Average 18.25% 8. Average margin computed by assessee of 13 comparables under software support service segment was 24.82% and 3 comparables under marketing support service segment was 18.25%. Ld.AO thus computed proposed adjustment as under: S.No Particulars Amount 1 Software Development services 25,97,51,615 2 Marketing Services 39,43,401 Total Adjustment 26,36,95,016 9. Ld.AO while passing draft assessment order, Ld.AO treated consideration received by assessee on transfer of its wireless division to M/s.Intel Mobile Communications Pvt.Ltd., as a going concern as short term capital gain amounting to Rs. 90,65,90,180/- as against long-term capital gain considered by assessee. 10. Ld.AO also disallowed software expenses under section 40(A) amounting to Rs. 24,13,306/- as assessee failed to deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unctions under service agreement and research and development agreement executed with Infeneon Singapore: * Perform research and development and services * Perform additional tasks as specified by associated enterprises * Provides all requisite services to facilitate Logestic for software development services. * Provides such other ancillary or related services as may be reasonably be required and requested by associated enterprises * to ensure that it has the requisite expertise, infrastructure and personnel to provide the services and to perform its obligation. Assessee has thus been set to be involved in identification of resources, recruitment of manpower, assignment to go of qualified personals, development of software in accordance with design para meters laid out by associated enterprise and delivery of software. Assets employed: Assessee primarily owns employees, property, plant and equipment for purposes of carrying out its activities and rendering of services to its associated enterprises. Risks assumed: On perusal of page 726-727 of paper book it has been stated that assessee undertakes certain risks like service level quality risk, technology risk, Attrit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Technologies Pvt. Ltd., reported in (2017) 88 Taxmann.com 309, he submitted that new filter suo moto cannot be applied by DRP selectively, but should be applied to all comparables. He also submitted that RS Software India Ltd., rejected by DRP was acceptable to assessee as well as Ld.TPO. In support of aforestated view reliance was also placed on decisions of Delhi Tribunal in case of DCIT vs Vertex Customer Services in ITA No.5228/Del/2018 vide order dated 06/11/17 and Aircom International India Pvt. Ltd., in ITA No. 04/04/03/del/2012 vide order dated 19/05/17. It has thus been contended that entire analysis needs to be revisited based upon new filter, applied by DRP and therefore needs to be set-aside to Ld.TPO. On the contrary, Ld.AR submitted that issue of suo moto application of "on-site revenue" filter by DRP has been addressed by coordinate bench of this Tribunal in case of Autodesk India Pvt.Ltd vs ACIT in ITA(TP)A No.156/Bang/2016 for assessment year 2011-12 vide order dated 21/12/18. He further submitted that, assessee do not have any objection for RS Software India Pvt. Ltd., to be included. We have perused submissions advanced by both sides in light of records pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the DRP has observed that this company, 'Acropetal', operates in three segments and the segmental results are available; while on the contrary the assessee contends that 'Acropetal' operates in four segments. Further, it is seen that even though the assessee has raised the other issues before the DRP, as laid out in para 13.1 of this order, the DRP has not rendered any finding thereon. We find that the co-ordinate bench of this Tribunal in the case of AMD India (P.) Ltd. (supra) relied on by the assessee has excluded 'Acropetal' on the ground that it fails the service income filter of 75%; a ground apparently not put forth by the assessee before the authorities below. 13.3.2 Considering the facts and circumstances of the case, as discussed above; that the DRP has not rendered findings on some of the issues raised by the assessee before it and there is a contradiction in the number of segments that this company 'Acropetal' operates in, we are of the opinion that it is necessary to remand the issue of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Special Bench (supra), we admit this additional ground raised by the assessee seeking exclusion of these two companies (i) L&T Infotech Limited (ii) Sasken Communication Technologies Limited without commenting on the merits of the case and remit the matter of their comparability analysis to the file of the TPO/A.O. for examination of the assessee's claim and to adjudicate thereon after providing the assessee adequate opportunity of being heard, which shall be duly considered. We hold and direct accordingly." 8.9. On perusal of aforestated observations by coordinate bench of this Tribunal, it is clear that, comparables were remanded for the reason that in case of Accropatel, DRP rendered finding that segmental details being available was contrary to materials, placed on record. And in case of L&T, coordinate bench sent back comparable for reason that financial details which were unavailable on public domain was subsequently available for consideration. 8.10. But, in the facts of present case, there is no such dispute between parties, and findings of DRP are concurrent with annual reports placed in paper book filed before us. Thus, in our considered opinion, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Operations (P) Ltd vs DCIT(supra) in identical manner. We note that DRP while excluding alledged comparables by applying onsite revenue filter, has considered functional dissimilarities too. We reproduce the observation of this Tribunal in case of Hewlett Packard India Software Operations (P) Ltd vs DCIT(supra) on the issue as under: 9.2.............. It is observed that, this Tribunal in case of Autodesk India Pvt Ltd. vs ACIT (supra) excluded E- Infochips Ltd., by following view taken by this Tribunal in case of Comscop Network (India) Pvt. Ltd., vs ITO in IT (TP) A/Bang/2016 dated 22/02/17 wherein, this company was excluded for reason that there is no segmental information regarding diverse functions performed by this company, and that there was major fluctuation in its profits, which influenced turnover of this company. Further it is observed that in case of DCIT vs M/s CGI Information Systems and Management Consultations Pvt.Ltd., in ITA No.502/Bang/2016 for assessment year 2011-12 vide order dated 06/04/18 dealt with identical objection raised by Ld. CIT DR before as under: "24. As far as ground No. 4 raised by revenue is concerned, the said ground of appeal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate from aforestated view. Thus, in our considered opinion, E-Infochips Ltd., is not functionally similar with that of assessee, who is a contract service provider, working on a cost plus business model. Accordingly, Ground no.(vi) stands dismissed. Ground No. (vii) -(xi) has been submitted to be general in nature hence do not require adjudication. In the result appeal filed by revenue stands partly allowed. ITA No. 656/B/2016 (assessee's appeal) It has been submitted that Ground No. 1-11 are general in nature and therefore do not require any adjudication. Software Development Service Segment Ground No.12 contains certain comparables which has been alleged by assessee for exclusion for are as under: * Persistent Systems and solutions Ltd * Persistent Systems Ltd * Sasken Communication Technologies Ltd a) Persistent Systems and Solutions Ltd This comparable has been included by Ld.TPO though it has been objected by assessee on functional dissimilarities. It has been submitted that segmental information is in respect of this company is not available in the annual report. Ld.CIT.DR placed reliance upon the orders of authorities below. We have perused submissions adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration revenue from software products is more and it launched a new product called VYAPAR SEVA. Ld.AR submitted that this company has significant intangibles and inventory is and therefore should be rejected to be compared with a captive service provider like assessee. In support of his contentions, he placed reliance upon decision of this Tribunal in case of Comscope Networks (I) Pvt.Ltd. vs ITO in IT(TP)A No.166 & 181/B/2016, vide order dated 22/02/2017. He also placed reliance upon decision of this Tribunal in case of M/s.Electronic Imaging India Pvt.Ltd vs DCIT in IT(TP)ANo. 1506/B/2015 and IT(TP)A No.16/B/2016 by order dated 14/07/2017, wherein this comparable has been excluded. On the contrary, Ld.CIT DR placed reliance upon orders passed by authorities below. She submitted that though there is revenue from 3 separate segments however the segmental information are a available. It was submitted that product launched is for a future period and has not generated any revenue during the year under consideration. There is no impact of this launch on the financials of this company for the year under consideration. In all fairness she submitted that the issue m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in light of records placed before us. From annual report placed in paper book, it is observed that this company recognises revenue from sale of stall space in exhibition and events. It is also noted that this company owns intangibles in the nature of trade Mark and copyright which makes it functionally different with assessee as it does not own any of such intangible rights. This comparable is basically into event management which is clear from the revenue recognition policy. In our opinion, the activities carried on by this company is not similar with that of assessee that is engaged in providing sales and marketing services of the software developed by its AE's. Accordingly, we direct exclusion of this comparable from final list. Ground No. 13.2 is for inclusion of Concept Communications Ltd., and Cyber Media India Online Ltd. Cyber Media India Online Ltd.: Ld.AR submitted that Ld.TPO erred in excluding this comparable though Ld.TPO accepted that this comparable satisfies all filters. It has been submitted that Ld.TPO and DRP upheld exclusion of this comparable by stating that annual report has not been furnished. Ld.AR submitted that the paper book filed before authoritie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables and assessee and therefore Ld.TPO was right in granting working capital at 1.63%. We have perused orders passed by authorities below on the basis of records placed before us. It is noted that working capital adjustment has been restricted by Ld.TPO and upheld by DRP at 1.63% which is contrary to provisions of transfer pricing rules. As held by various decisions of coordinate benches of this Tribunal, we direct Ld.TPO to recompute working capital adjustment in actual, and to consider the same for purposes of computing arm's length margin as per the view expressed by this Tribunal in case of Huawei Technologies India Pvt. Ltd vs JCIT reported in (2019) 101 taxman.com 313. It is necessary to analyse the working capital of comparables for earning revenue under SWD segment. Assessee is directed to provide for necessary details in respect of comparables that remains in final list. If that information is insufficient, it is beyond the power of Assessee to produce correct information about comparable companies, does not ipso facto meant that such adjustment should be denied. Revenue on the other hand has sufficient powers u/s.133(6) to compel production of required details from co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n valuation report provided by the buyer by making following observations: * value of assets detailed in the business transfer agreement entered into by assessee and the buyer was not in consonance with the details provided by buyer; * that the assessee could not explain the difference between the value adopted by the buyer and the value determined in the agreement; * that the agreement is made in terms of tax planning and the valuation report contains date of acquisition and cost of all assets acquired by the buyer. DRP simply upheld the observations of Ld.AO in the draft assessment order without appreciating the material is filed by assessee. Ld.AR submitted that the transfer of wireless division by assessee is on as is where is basis. It has been submitted that following assets have been transferred to the buyer that pertained to wireless division: * all assets including computers, leasehold improvement and office equipments; * lease agreement of facility; all business employees and customer contracts. It has been submitted that the entire undertaking of wireless division has been transferred for a lump sum consideration without assigning any value to individual ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed before us Section 2 (42C) of the act defines the term, "slumped sale" to mean the transfer of one or more undertaking for a lump sum without assigning value to individual assets and liabilities in such sale. The term "undertaking" has been defined in section 2 (19AA) of the act to mean any part of an undertaking or unit or division of an undertaking or business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. A co-joint reading of both these sections makes it clear that for sale to be treated as slump sale 3 conditions have to be satisfied: * the business transferred should qualify as an undertaking; * the business should be transferred as going concern basis; and * the transfer should be for a lump sum consideration without assigning value to individual assets and liabilities. In the present facts of the case, we have perused the business transfer agreement wherein it is noted that as per clause 2.3 (a) of the agreement, assessee has transferred all technical employees including liabilities relating to employees to the buyer. In the written submissions filed before a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IMC for a lump sum consideration of Rs. 985,741,680. The table below details the gain on transfer of the division: Particulars Amount (in Rs.) Anount (in Rs.) Amount received from IMC 985,741,680 Less: Net Book Value of Assets Transferred Leasehold Improvements 5,671,884 Computer Systems 34,804,879 Office Equipments 68,380,199 108,856,962 Gain on debonding of assets for the transaction (497,706) Net Gain on sale of wireless division 877,382,424 Further, the buyer did not intend to purchase the assets individually and that they intended to buy the wireless unit for a lump sum price. Even though the transaction has components of itemised sale it has to be characterised as slum sale under Income tax Act in substance based upon structuring of agreements. In support, we place reliance upon and decision of Hon'ble Bombay High Court in case of Narakeshari Prakashan Ltd reported in 196 ITR 438. In our opinion to conclude that a transaction is a slum sale or not is not only based on interpretation of terms and conditions of the entire agreement but it is also based on the manner in which the gains has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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