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TMI Blog2020 (5) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer in pursuance of the directions of the Dispute Resolution Panle (hereinafter referred to as 'DRP') under Section 143(3) read with Section 144C of the Income-tax Act, 1961 ('Act'), is bad in law, violative of principles of natural justice and void ab-initio. 1.1 That the Assessing Officer erred on facts and in law in passing order under section 143(3) read with Section 144C of the Act at an income of ₹ 57,96,95,314 as against returned income of ₹ 35,04,84,700. 2. That the assessing officer erred on facts and in law in making an adjustment of ₹ 18,16,82,680/- to the arm's length price of the 'international transactions' of provision of software development services undertaken with the associated enterprise on the basis of order passed by the Transfer Pricing Officer ('TPO')/Dispute Resolution Panel ('DRP'). 2.1 That while giving effect to the direction of DRP, the AO/TPO erred on facts and in law in computing the operating profit to cost ratio of appellant at 9.61% as against 15.20% (13.17% in AE segment) computed by the appellant, by erroneously considering foreign exchange fluctuation income of ₹ 10,51,15,282/- as non-operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and in law in making an adjustment of ₹ 4,75,27,934/- to the arm's length price of alleged 'international transactions' of delay in receipt of outstanding receivables, on the basis of order passed by the Transfer Pricing Officer ('TPO')/Dispute Resolution Panel ('DRP'). 3.1 That the DRP/TPO erred on facts and in law in re-characterizing the alleged transaction of delay in receipts of receivables as unsecured loans advanced to the associated enterprises. 3.2 That the DRP/TPO erred on facts and in law in not appreciating that delay in receipt of receivable is not an 'international transaction', per se, under section 92B of the Act but is a consequence of an 'international transaction' undertaken in the form of services rendered to the associated enterprise. 3.3 That the DRP erred on facts and in law in holding that the nonrealization of invoice value beyond the stipulated period (as per contract) is a separate international transaction, whose arm's length price is required to be determined separately. 3.4 Without prejudice, that the DRP/TPO erred on facts and in law in not accepting that in any case the transaction of delay in respect of receivables was closely link ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Software Technology Parks of India scheme (STPI). For the year under consideration, the assessee filed its return of income on 27/11/2014 declaring total income of ₹ 35,04,84,700/-. The return of income filed by the assessee was selected for scrutiny assessment and statutory notices under the Income-Tax Act, 1961 (in short the 'Act') were issued and complied with. In view of the international transaction carried out by the assessee with its Associated Enterprises (AEs), the learned Assessing Officer referred the matter of determination of arm's-length price of the said transaction to the learned Transfer Pricing Officer (TPO). The Learned TPO in his order dated 04/10/2017 proposed transfer pricing adjustment of ₹ 26,82,48,663/-which consisted of adjustment for provision of software development services amounting to ₹ 21,09,11,213/- and adjustment for interest on receivables amounting to ₹ 5,73,37,450/-. The Assessing Officer in his draft assessment order included the transfer pricing adjustment proposed by the learned TPO. On the objection filed by the assessee against the proposed transfer pricing adjustments, the learned DRP after considering submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been engaged in the provision of the software development services which included product realization, product testing, migration and porting, product maintenance and support and product extensions. The profile of the assessee available on page 49 of PB-I is reproduced as under: "2.6 PROFIT OF GL INDIA GL India is a company registered under the provisions of the Companies Act, 1956 and is a subsidiary of Global Logic Inc. GL India is engaged in the provision of software development services to its customers including Global Logic Group Companies. The departments of GL India include delivery, finance & legal, human resource (including employee services, recruitment, resourcing and learning & development and operations. During the year, there were approximately 1,575 employees on the payroll of GL India. The company has offices in Noida, Bangalore and Nagpur. The Company operates through certain EOU registered with the STPI and SEZ." 4.2 The assessee reported following international transactions in its transfer pricing study: Sl. No. Nature of transaction Method applied Value of transaction (in Rs.) 1. Amount Received for the software services provided TNMM 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the learned TPO computed adjustment of ₹ 21,09,11,213/-to the value of the international transaction reported by the assessee. On the direction of the learned DRP to exclude/include the comparables, finally 13 comparables are retained with their average margin at 20.80%. The adjustment has accordingly has been computed at ₹ 18,16,82,680/-. 4.8 The comparable sought to be excluded before us by the assessee are adjudicated as under: Mindtree Ltd. 5. This company was initially selected by the assessee as comparable, however during the course of proceeding before the Ld. TPO, the assessee sought to exclude the company from the set of the comparables on the ground of functional dissimilarity. The learned TPO referred to the various pages of the Annual Report of the company ( i.e. P-77, P-92 , P-32 ) and profit and loss account and held that the company provided software development services, which is functionally similar to the assessee, who is also developing software for the associated enterprises. 5.1 Before the Learned DRP, the assessee taken following objections against inclusion of the company: "1. It is functionally different as it is seen that the company h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmunication, electronics and healthcare and also has ongoing partnership with product markets in these fields. The assessee company, during the year was having approximately 1575 employees on its payroll and was possessing skills in major technologies like Java, Microsoft, VoIP, mobile technologies, Web services, integration with back-office application such as SAP, Siebtel, MS exchange and databases (Oracle, SQL Server, DB2, Sybase, MS access) . The assessee claimed to have included services development delivery and integration of a specialized items, product testing. The assessee also uses a migration methodology provided by the GL group that covers all phases from impact analysis to deployment and testing. The assessee also was engaged in providing product extension services, append new features and functionality to existing products. Thus, the assessee is engaged in developing software products for the Associated Enterprises through skills possessed in various technologies and also in extension of functionality of existing products of the Associated Enterprises. The assessee is also engaged in providing services of maintenance and support, testing, migration and porting etc to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for software companies in the product support team as a combination of the domain and technology experts providing quality supports. In view of the fact that assessee is also engaged in providing various kind of services associated to software product development in comparison to the company which is engaged in providing services related to software. Thus, we reject the contention of the assessee for excluding the company from the set of the comparable on the ground of functional dissimilarity. 5.11 The next argument of the learned Counsel of the assessee that company possess intangible assets worth millions of rupees. This argument of the company has been rejected by the learned DRP. The learned DRP has noted that the company owns intangible of ₹ 17.10 crores, which includes software of ₹ 15.50 crores and intellectual property is only of ₹ 1.50 crore as against the operating revenue of ₹ 3081 crores and thus the intellectual property owned is very insignificant. We agree with this finding of the learned DRP, and accordingly reject the contention of the assessee of difference in the asset base of the company as compared to the assessee. 5.12 The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , expenses on cost of the bought-out items for resale, multiple segments and extraordinary event. 6.3 The Learned DR, on the other hand, relied on the finding of the lower authorities. 6.4 We have heard rival submission of the parties on the issue in dispute. The learnedCounsel of the assessee submitted that the company owns significant intangibles (₹ 75,04,78,329/-) in the form of the software and intangible assets under development. On perusal of fixed assets schedule, available on page S-1245 of the Annual Report ( page 116 of PB-2), we find that at the beginning of the year the assessee owned intangible assets of ₹ 153,42,45,196/- which included software of ₹ 143,61,95,196 ( 93 %), thus the intangible other then the software are insignificant. During the year, the company has sold/transferred the software and claimed depreciation, which resulted in net block of software at the end of the year to ₹ 33,22,11,879/-. The assessee has also shown intangible assets under development of ₹ 41,82,66,450/-, which makes the net intangibles owned by the company to ₹ 75,04,78,329/- at the end of the year. But no depreciation has been claimed on the under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RING SERVICES (PES) BUSINESS TO L&T TECHNOLOGY SERVICES LIMITED (LTTSL) AND WINDING UP OF GDA TECHNOLOGIES INC. (GDA INC.) As part of business restructuring undertaken within L&T Group, it was decided to consolidate the engineering services business under a separate subsidiary of L&T, L&T Technology Services Ltd. (LTTSL). Pursuant to this, the Company initiated and completed transfer of its Product Engineering Services (PES) Business Unit to LTTSL effective January 1, 2014, PES Business Unit was transferred by way of slump sale for total sales consideration of ₹ 489.53 crs based on fair valuation, GDA Technologies Inc., USA (GDA Inc.), a wholly owned subsidiary of the Company was part of PES business with synergy in terms of the end customers they serve, primarily the semiconductor companies. Over last few years, the performance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, certain IPs (Intellectual Properties) owned by GDA Inc. were transferred to LTTSL, the Company was wound up during the year." 6.7 In view of the above reporting, it is clear that under the telecom segment, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, the learned Counsel of the assessee referred to page 257 of PB-2 and submitted that company specialize in software products, service and technology and it offers complete product life-cycle services. The Learned Counsel relied on the decision of the coordinate bench of the Tribunal in the case of Saxo India private limited Vs ACIT (ITA No. 6148/Del/2015) to support that the company is engaged in development and product design and analysis services, which is functionally different from a pure software service provider and therefore it ought to be excluded. The learned Counsel submitted that the appeal filed by the Revenue against the decision was dismissed by the Hon'ble Delhi High Court in ITA No. 682/2016. The Learned Counsel also submitted that in assessee's own case for assessment at 2008-09 (ITA No, 122/Del/2013) the company has been excluded from set of comparables. Accordingly, he submitted that the company might be excluded in the year under consideration also. 7.3 The Learned DR, on the other hand, relied on the order of the lower authorities. 7.4 We have heard rival submission of the parties and perused relevant material on record. Regarding the contention of the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year under consideration, the share of revenue from software services was of 82.0% and IP led product was of 18%. 7.7 Further on page 97 of the Annual Report ( page 284 of PB-2) under management discussion and analysis, the product strategy has been reported as under: "Product strategy Over the last three years, in consultation with our large customers, we have created a business that is based on IP revenues. In this business line, our revenues are not directly related to the number of employees on the project but depend on the outcome from product sales. There are three kinds of IP business that we are focusing on: a) Business acquired from customers by taking over some of their non-strategic products b) Developing products that fill white-spaces in our customer's products. c) New products built by us Over the last three years, our IP portfolio has grown well and contributes to nearly 20% of our business and is growing. To accentuate our focus on products and to ensure that we are seen as a credible product company, we have created a separate business unit branded as Accelerite based out of our Silicon Valley offices. Accelerite will be our product b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternet of things (IOT), big data analytics, cloud mobility, virtual reality and artificial intelligence. All these functions being different from the assessee, the company should be excluded. The learned DRP, however held that under TNMM, the broad functional similarity is to be seen and thus upheld the action of the learned TPO. Before us the Learned Counsel of the assessee repeated the submissions made before the learned DRP and submitted that revenue from the operations include revenue from product design, graphics animation and gaming and system integration and support. According to him all these activities are functionally different from that of the assessee. He also submitted that the in assessee's own case for assessment year 2007-08 and 2008-09, the Coordinate bench of the Tribunal in ITA No. 5809/Del/2011 and 122/De/2013 has directed to exclude the company from the set of the comparables. 8.1 The learned DR on the other and relied on the order of the lower authorities. 8.2 We have heard the rival submission of the parties on the issue in dispute and perused the relevant material including annual report of the company. The details of revenue from operations available on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... highlight that the company's operation comprises of software development, implementation and support services, which are various segment of the software development services only and required deployment of software engineers and therefore company is comparable to the assessee. 9.1 Before the learned DRP, the assessee claimed that during the year the assessee has earned revenue aggregating to ₹ 20,675.74 lakhs from sale of the software products and in absence of segmental result of software development services and sale of the software products, the company cannot be treated as comparable. The learned DRP, held that company is engaged in two business segments namely information technology (IT) and information technology enabled services (ITes) and held the company as functionally similar to the assessee. 9.2 Before us, the learned Counsel of the assessee repeated the argument that the company is engaged in sale of products. He supported this claim on three grounds. Firstly, in the profit and loss account revenue has been shown from sale of software products. Secondly, the following information on the website of the company also support sale of the products: "Thirdware's m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration consist of export of software services (₹ 20,194.37 Lakhs) , software services from local unit (₹ 414.07 Lakhs) , revenue from subscription and training (₹ 59.32 lakhs) and sale of licence( ₹ 7.98 Lakhs). Similar composition of the revenue of preceding year has also been given in the footnote. Further, on perusal of part of management discussion and analysis , available on page 13 of Annual Report ( PB-445), we find that under the heading foreign exchange earning an outgoing and technology absorption, adaption and innovation, the activities of the company has been shown as export of software services. The relevant part of the management discussion and analysis reproduced as under: "FOREIGN EXCHANGE EARNING AND OUTGOING: The Company's earnings are to a significant extent export oriented and the company is constantly reviewing and augmenting its efforts to increase export of software services and applications to existing and new markets and for this purpose has also drawn long-term strategy to strengthen its overseas marketing infrastructure. The particulars regarding foreign exchange and outgoings are reflected in Notes to Accounts. TECHNOLOGY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lid comparable. Infobeans Technologies Ltd. 10. Before the learned TPO, the assessee sought exclusion of the company on the ground of insufficient data/segmental information and functional dissimilarity. The learned TPO, however, referred to website and Annual Report of the company to highlight that the company is mainly engaged in providing software development services. 10.1 Before the Ld. DRP, the assessee submitted that company is providing wide-ranging services including automation engineering, Service Now, UX and UI and customize software services. Further it was submitted that company is doing business in three verticals i.e. Storage and visualization, publishing and SDO and e-commerce and no segmental bifurcations available in respect of the range of services. It was also submitted that this is exceptional year of operation in view of the increasing revenue of 52.0% and increase in profit before tax of 85.66%. The learned DRP however held that automation engineering is in context of providing automated testing services, which is part of software development services. Regarding exceptional year of operation, the learned DRP, held that the assessee has not demonstrated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .8 The term UX design refers to the term "user experience design", while UI stands for "user interface design". The user experience and user interface design are to be kept in mind while designing or developing the software, thus these range of services are part of software development services. 10.9 The three verticals in which company is doing business ,is not making it functionally different. The prime function in all the three verticals remain the software development. 10.10 The assessee has placed reliance on the decision of the Tribunal in the case of Pubmatic Private Limited (supra), where the Tribunal has observed that company has shown foreign exchange from export of goods on FOB basis and thus in absence of segmental data, the company cannot be treated as comparable to a software development service company. 10.11 We find that the decision of the Tribunal is in relation to assessment year 2012-13, whereas the assessment year involved before us is 2014-15 and therefore result of that year being different, the decision relied upon by the assessee is distinguishable. We find that in the year under consideration in the Annexure to Auditors Report (page 76 of PB-2) in para ..... X X X X Extracts X X X X X X X X Extracts X X X X
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