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TMI Blog2024 (9) TMI 1119X X X X Extracts X X X X X X X X Extracts X X X X ..... ation account is only to monitor the exchange movement and settlement mechanism with the AE and it does not form or impact anyway in the operating revenue or operating expenditure of the assessee. The assessee will be compensated the contract price or invoice value by the AE. Therefore, it can have no place in the financial results of the assessee company. Hence, the operating income/expenses of the assessee is not impacted by the currency fluctuations. If there is upward movement, the AE will make suitable adjustment in the contract prices. It is relevant to note that the revenue/ cost model adopted by the AE by suitably taking care of the exchange risk of the subsidiary company, the relevant exchange risk is the cost/revenue to the AE, as and when they compensate the same. This can never a risk factor to the assessee leading to incurring any revenue income or loss to the assessee. This findings is based on the submissions that the transactions are only with the AE s and any other transaction not involving the AEs, may be claimed as operating expenditure, as the risk factor is mitigated only with the transactions with AE. Therefore, all the transactions are recorded by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is selected for comparison. In this case, it may be functionally comparable but this company has failed in the selection criteria of persistent loss. Therefore, we are inclined to reject the submissions of the assessee and accordingly dismissed the ground raised by the assessee. Exclusion of two comparables selected by the TPO relating to Whirlpool and Penguin Electronics - We observe that the assessee is exclusively engaged in the manufacturing, trading of mobile phones. The functions in manufacturing, pricing, branding etc are unique to the mobile phones and its accessories. It cannot be generalized with any of the home appliances or kitchen appliances. The comparables selected are Whirlpool and Penguin, which basically deals in various home as well as kitchen appliances, the products are many kind and distinct to the assessee company. These can never the proper comparables to the present assessee. Accordingly, we direct the AO/TPO to delete the above said comparables from the final comparables. Accordingly, the grounds raised by the assessee are allowed in this regard. Comparables selected for CSD segment - Infobeans Technologies - As quantum of export of the goods and export of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dispute Resolution Panel (DRP)/TPO vide order dated 05/10/2017 for Asst. Year 2014-15. 2. The assessee has raised the following grounds of appeal:- 1. General Grounds of Appeal 1.1. That, the final assessment order framed by the learned Joint Commissioner of Income-tax, Special Range -1, Delhi (hereinafter referred to as the Ld. AO ) pursuant to the directions of the Hon'ble Dispute Resolution Panel-1 (hereinafter referred to as the Hon'ble DRP ) under section 143(3) read with section 144C of the Income-tax Act, 1961 ( the Act ), is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab-initio. 1.2 That, in framing the impugned assessment order, the reference made by the Ld. AO under section 92CA(1) of the Act suffers from jurisdictional error, as the Ld. AO had not recorded any reasons nor he had any material whatsoever on the basis of which he could even reach a prima- facie opinion, that it was 'necessary or expedient' to refer the matter to the learned Additional Commissioner of Income Tax, Transfer Pricing Officer - 2(3), New Delhi (hereinafter referred to as Ld. TPO ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D of the Act. 2.3 That on the facts of the case and in law, the Ld AO/Ld. TPO/Hon'ble DRP has erred by treating foreign exchange gain and miscellaneous income as non-operating item while computing adjustment for international transactions pertaining to NMP segment. 2.3.1. That on the facts of the case and in law, the Ld. AO/Ld TPO/ Hon'ble DRP grossly erred in law in relying on the provisions of the Section 92CB of the Act read with Rule 10TA of the Rules for excluding foreign exchange gain from the computation of operating revenue; 2.3.2. That on facts of the case and in law, the Ld. AO/Ld. TPO/ Hon'ble DRP completely failed to apply their minds while relying on Safe Harbor Rules ('SHR') since the SHR are applicable to 'eligible assessee' as defined in Rule 10TB of the Rules in relation to 'eligible international transactions' as defined in Rule 10TC and the Appellant, as part of NMP segment, did not qualify as an eligible assessee' and the international transactions pertaining to the NMP segment did not qualify as 'eligible international transactions'; 2.3.3 That on facts of the case and in law, the Ld. AO/ Ld. TPO/ Hon'ble DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n particular, erred in rejecting Zenith Computers Limited as comparable to the NMP segment on the ground that the said company has incurred persistent losses without appreciating the fact that the said company had operating profits in one out of three financial years. 2.4.2. The Ld. AO/ Ld. TPO, in particular, erred in selecting Whirlpool of India Limited and Penguin Electronics Limited as comparable companies without appreciating that such companies are not functionally comparable to the NMP segment of the Appellant. 2.5 That on the fact of the case and in law, the Ld. TPO/Ld. AO/ Hon'ble DRP has erred in not allowing a risk adjustment to the Appellant on account of the fact that the Appellant is a limited risk bearing contract manufacturer for its AE and does not undertake market risk, product liability risk, credit and collection risk, inventory and capacity utilization risk as against comparable companies that are the full-fledged risk bearing entrepreneurs. TP adjustment in relation to international transactions pertaining to provision of Contract Software Development ( CSD ) services. 3. That on the fact of the case and in law, Ld. AO/ Ld. TPO/Hon'ble DRP have erred, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to provision of CSD services. 3.5.2. The Ld. AO/ Ld. TPO, in particular, erred in rejecting Lucid Software Limited and Cat Technologies Limited as comparable to the Appellant in relation to the international transaction pertaining to provision of CSD services on the ground that the said companies have incurred persistent losses without appreciating that the companies were functionally comparable to the CSD segment of the Appellant and that the said companies had operating profits in one out of three financial years. 3.6 That on the fact of the case and in law, the Ld. TPO/Ld. AO/ Hon'ble DRP has erred in not allowing a risk adjustment to the Appellant on account of the fact that the Appellant is a captive service provider for its associated enterprises and is remunerated on a cost-plus basis irrespective of the outcome of the services provided and hence undertakes no market risk, service liability risk, credit and collection risk as against comparable companies that are the full- fledged risk bearing entrepreneurs. Levy of interest under section 234A and 234B of the Act. 4. That on the facts of the case and in law, the Ld. AO has erred in levying interest under section 234A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Accessory segment (MPA) and b) Contract Software Development Segment (CSD). 6. The facts relating to MPA segment and ground nos. 2.1 and 2.2 raised by the assessee for treatment of foreign exchange gain as part of the operating income of the Assessee are, the AO/TPO has not treated the foreign exchange gain transactions as part of the operating income and determined the ALP adjustment accordingly. Even the Ld DRP has sustained the findings of AO/TPO. Aggrieved, the assessee is in appeal before us. 7. At the time of hearing, Ld AR submitted as under: 7.1. At the very outset, it is of seminal importance to highlight that the AO as well as Dispute Resolution Panel ( DRP ) committed a blatant mistake by treating the foreign exchange gain as non-operating item, thereby, excluded the same from the operating revenue while computing profit level indicator being Operating Profit/ Operating Cost. Whilst doing so, the reasons provided by the DRP/Transfer Pricing Officer ( TPO ) are as follows: a. That in terms of the definitions as provided under clause (j) and (k) of Rule 10TA of the Income Tax Rules, 1962 ( IT Rules ) Safe Harbour Rule for International Transactions, the term operating re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of the ITAT categorically held that since the foreign exchange fluctuation loss suffered by the Assessee directly resulted from the trading activity, the same ought to be considered as operating item as opposed to non-operating item. Reliance in this regard is also placed on PCIT v. B.C. Management Services (P.) Ltd., (2018) 403 ITR 45 (Delhi High Court); PCIT v. Rolls Royce India Pvt. Ltd., [Order dated 23.10.2017 in ITA 419/2016 747/2016] (Delhi High Court). 7.5. Further, the coordinate bench of the Tribunal in the case of Convergys India Services (P.) Ltd. v. ACIT. [2022] 134 taxmann.com 15 (Delhi Tribunal), while dealing with the identical argument of foreign exchange fluctuation risk being borne by the foreign AE, specifically opined that foreign exchange fluctuation is an integral part of the sale and purchase transactions and in essence, an integral part of the international transaction entered by the Assessee and thus, in that view of the matter, the same would be treated as an operating item while determining arm's length price under chapter X of the Act. In the instant case, the Appellant was engaged in import of raw materials and export of finished product to its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign exchange loss along with a mark up. c. Conversely, in case of foreign exchange gain, the same should be considered as part of operating revenue and should form part of the transfer pricing. This is because in case where the AE assumes the loss arising from the foreign exchange loss, the gain, if any should also be assumed by the AE only. Thus, in case of a foreign exchange gain of say INR 63 and cost base being INR 10,000/- the Appellant will receive only INR 10,100/- as the Appellant has already received part of such remuneration being INR 63, in the form of foreign exchange gain. Thus, in case such foreign exchange gain is not considered as an operating income for the purpose of benchmarking. same will result in foreign exchange risk being assumed by the Appellant which is clearly not the case. 7.9. Hence, on this count as well, the actions of the DRP and AO are untenable in the eyes of law, liable to be quashed. 7.10. Before delving into the specific arguments for inclusions and exclusions of comparable, it is humbly submitted that in case where the foreign exchange gain is considered as operating income, the margin earned by the Appellant will be more than the arm' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble cannot be excluded only on the grounds of persistent losses or declining revenue in is functionally comparable to the Assessee. Therefore, on this count as well, Zenith is liable to be included in the final set of comparables whilst determining arm's length price under chapter of the Act. Copy of the said decisions is being enclosed for the sake of ready reference. 9. CONTRACT SOFTWARE DEVELOPMENT SEGMENT With regard to Exclusion of Infobeans Technologies Ltd., Persistent Systems Ltd., Larsen and Toubro Infortech Ltd. and Mindtree Ltd. (Concise Grounds of Appeal-Ground No. 3-3.2) 9.1 Ld AR submitted that he relies on the Chart submitted during the course of hearing on 20.06.2024 and further submitted as under: a. Infobeans Technologies Ltd .: Functionally dissimilar (pg. 14-15 of the AR Compl), No segmental data available: Engaged in high-tech software services (pg. 44 of the AR Compl.) Rely on Avaya India Ltd. v. ACIT, (Order dated 24.09.2019 in ITA No. 7290/Del/2018) (Delhi Tribunal) (Rel Para. 7 at page 67-68 of the Case Law Compilation). b. Persistent Systems Lid : Functionally dissimilar (g. 100, 105 and 120 of the AR Comp.), R D Activities (pg. 131 of the AR Compl.), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2017) (Delhi Tribunal); Velocity Tech-Sol India Pvt. Ltd. v. ACIT, [Order dated 30.05.2022 in ITA No. 1694/Pun/2018] (Pune Tribunal), is grossly misplaced since all these Assessee/s were performing different high-end functions in the software industry and could not be compared with the Appellant being a captive service provider. The difference being that in the case relied upon by the Revenue Department, the tested parties were engaged in provision of software development services on behalf of its foreign AE's for customers of the foreign AEs, while the Appellant herein is engaged in captive software development services i.e., coding and testing for mobile phone software installed in the mobile phones manufactured and sold by foreign AEs. Further, none of the judgments relied upon by the Revenue Department deal with the previous decisions rendered by the Tribunal and the High Courts and thus, are per incuriam to that extent and cannot be relied upon. 10 ADDITIONAL GROUNDS OF APPEAL REFUND OF EXCESS PAYMENT OF DIVIDEND DISTRIBUTION TAX UNDER SECTION 115- 0 OF THE ACT (CONCISE GROUNDS OF APPEAL-GROUND NO. 5- 5.3) 10.1 By way of additional grounds of appeal, the Appellant seeks re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s operations and thus should be treated as operating in nature. Also, the assessee has relied on ICAI guidance note and stated that appropriate adjustment should be made for accounting practice including the adjustment on account of foreign exchange fluctuation to make the accounting treatment consistent and improve comparability. Further the assessee has also relied on some decisions of Hon'ble Tribunal. Department arguments: 11.4. The assessee company is a contract manufacturer of mobile phone and contract software developer to its AE's. Further in the TP study report, it has been clearly mentioned that the entire exchange risk is borne by the AE only and assessee s company is fully insulated for the foreign exchange risk i.e. gain or loss related to foreign exchange. For ready reference, the relevant extract of foreign exchange risk in the TPSR for both mobile phone as well as contract software development segment is reproduced below: (i) Mobile phone segment - mentioned in page 92 93/of paper book Foreign exchange risk Nokia India invoices to AEs in foreign currency and y makes payments to AEs in foreign currency for purchase of goods from AEs. However, since Nokia Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred/received by assessee company is compared with comparable companies which undertake the similar transaction independently. The foreign exchange gain/risk is usually undertaken at the end of the year and in a way it is not directly related to the transaction price. Also the foreign exchange gain/loss is based on the hedging policy of the foreign companies. For comparing two transactions with regard to foreign exchange risk undertaken by two different companies, there should be the same hedging policy adopted by the two companies. In the case of assessee, first of all, it is not exposed to any foreign exchange risk, secondly it is not demonstrated that even the comparable companies were following same policy of foreign exchange or they are exposed to the same foreign exchange risk. 11.7. DRP's directions and TPO's remand report: This issue of foreign exchange gain/loss, whether it should be treated as operating and non operating, is dealt extensively by the DRP which is discussed from para 2.3 in internal pages 7 to 15 of DRP order. Before the DRP, the assessee company has submitted the fresh computation and the DRP has also asked the remand report from the AO which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s cases are dealt differently from comparable companies because after the DRP directions, the TPO/AO has taken only the transactions price and not the associated foreign exchange risk gain/loss for comparing. When this fact was brought before the Hon'ble Tribunal, the assessee counsel could not explain the allegations that different comparison criteria was adopted in case of assessee and other with comparable companies or the prejudice caused with regard to comparison of transaction by transactions when the components of foreign exchange gain/loss in both the cases as well in comparable companies are considered non operating in nature. 13. The assessee other grounds i.e. it was treated as operating in the last years was also proved wrong and incorrect as discussed in detail in para 6 by the TPO in the remand report. There was no such mention of treatment of foreign exchange gain/loss in the earlier year and in that year there was no adjustment made in the mobile phone segment and only because of the facts that no adjustment was made no inference can be drawn that the TPO has considered the forex gains/loss as operating in nature. 14. Safe Harbour Rule It is also mentioned that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces outstanding at the end of the year. According to the Ld. DR, the foreign exchange loss represents operating income and according to the Ld.AR foreign exchange loss would not give any benefit to the AE and it is the loss on account of foreign exchange fluctuation which is unforeseen expenses by the assessee. Therefore, the foreign exchange loss or gain are to be excluded from the operating income. Foreign exchange loss or gain due to reinstatement of balance outstanding at the end of the year cannot be held as operating profit/loss since the same is an account of notional loss to comply with the accounting standards. With regard to the foreign exchange loss incurred in business operations for purchase of materials or for international transaction do not give any extra benefit to the AE who supplies the material, since the AE receives the payment in foreign exchange and the assessee also makes the payment in foreign exchange. The loss was due to exchange difference between the foreign currency and the Indian currency. Therefore, while computing the PLI, operating income for the purpose of PLI, both foreign exchange loss or gain should be excluded from the operating income. The D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cient revenue from comparable product. Thus, as blue star is in cooling product segment the assessee cannot again claim that zenith computers Ltd. should also be treated on the same line as blue star Ltd. Also, with regard to Penguine Electronic Ltd., it is stated that it is the assessee own comparable and the same has not been discussed at DRP level. Even for Whirlpool India Ltd., it is respectfully submitted the assessee has not objected before TPO and DRP. Thus, for both these comparables it is respectfully submitted that first of all these comparables have to be adjudicated upon by lower authorities only then, the Hon'ble ITAT can decide on this comparable. 19. B. Second issue: 1. The TPO has made an addition on account of adjustment in software development services of 15,64,90,000/- The assessee has raised the issue of inclusion / exclusion of certain comparables before DRP and DRP has granted some relief and after DRP, the adjustment has been reduced to 10,00,60,000/-. The assessee has approached the Hon'ble Tribunal and has raised the following two grounds:- i) The assessee has stated that it is not providing complete software development services and doing only a sm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant extract reproduced below: 13.2 After considering the rival submissions and perusing the relevant material on record, we find that the total sales of this company for the corresponding year ending is Rs. 38.31 crore. Para 17.2.13 of the Annual Report of this company provides that: 'The company is primarily a services company engaged in technical consulting, design development of software, maintenance, systems integration, implementation, testing and infrastructure management services'. Next para 17.2.14 dealing with Segment Reporting provides that: 'The Company's operations are predominantly related to providing software technical consultancy services to its sole customer Fujitsu Services Ltd.' Narration of the above facts from the Annual report of this company makes it explicit that it is engaged in providing technical consultancy, design and development of software. The Ld. AR's contention that the assessee is not into consultancy services is incorrect as has been noted above from the relevant parts of its Agreement with Headstrong UK Ltd. showing that the assessee is also into software consultancy. Be that as it may, in our considered opinion, softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctions performed by the Appellant in the CSD segment. (ii) Persistent Systems Limited The assessee has mention the following reasons for exclusion/rejection- 1. Functionally Dissimilar : Engaged in software products, services and technology innovation including research, engineering Services such as deployment, testing, quality assurance, performance tuning, usability engineering, porting, documentation services, deployment services. 2. R D activities: The company incurs significant R D expenditure which has resulted in significant intangibles. 3. Segmental information not available: As per the annual report of the company, it does not maintain segment information in relation to its product and service segment separately. It maintains segment in relation to market segment that it caters to. 4. Own significant intangibles: Persistent owns significant intangibles which have either been developed or have been acquired from third parties as part of its inorganic growth strategy. (iii) Larsen Toubro Infortech Limited The assessee has mention the following reasons for exclusion rejection- 1. Functionally dissimilar: L T is engaged in product engineering services which is different from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mindtree was INR 3031 crores. 8. Earning Supernormal Profit: Mindtree is earning supernormal profit, which is not representative of industry. 23. Department contentions- 1. The issue of comparability of all four comparable has been discussed in detail before the Hon'ble Bench during the course of hearings. It has been stated that Hon'ble I Bench itself in some cases has decided on the comparability of the above noted comparables same A.Y. i.e., 2014-15. It is further stated that these comparables were compared with the respective assessee companies and that to for providing software development services to the AEs only. As the decision has been taken by the respective Benches of ITAT Delhi only and the same financial statement has been analysed for arriving at the decision, accordingly it is humbly submitted that as the same financials of the comparables are produced for this year, accordingly, the details are not being discussed again for the sake of brevity. The decisions relied upon by the department for respective comparables are reproduced below:- 2. Reliance is placed on the decision of Hon'ble ITAT Delhi in the case of Steria India Ltd. vs. Addl.CIT, Special Ran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or ready reference, the relevant extract is reproduced below Mindtree Ltd. 17. The assessee has selected this comparable in the TPSR for the A.Y. 2012-13 and the company is generating revenue from software development and software services. 18. The assessee has sought its exclusion based on the following facts: (i) Functional dissimilar (ii) Different business model (iii) Research and development activity (iv) Segment data not available (v) High turnover. 19. The Id. AR submitted that the comparable incurred subcontract expenses of Rs. 140 Cr. and the Id. DR rebutted, arguing that this Rs. 140 Cr. constitute 0.3% of the total turnover and hence negligible. 20. With regard to the functional profile, the annual report (page 107/PB) reads Mindtree Limited (Mindtree' or the 'company') is an international in formation Techno consulting and implementation Company that delivers business solutions through global software development. The Company is structured into five verticals manufacturing, BFSI Hitech, travel and transportation and others. The Company offers services in the areas of agile, analytics and in formation management, application development and maintenance, busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: 2. Persistance systems Ltd. (PSL) (i) Functional profile: The assessee has requested for exclusion based on the fact that it is functionally different. The assessee has stated that this company is engaged in sale of software products and not software services. The assessee allegation has been duly answered by the TPO and DRP in page 40 and page 11 of respective orders. Also whether this company is a software product development company or services company is a fact which has already been answered in judgments of the Hon'ble Delh ITAT only which are mentioned below: The Hon'ble ITAT in its order in the case of Steria India Ltd. vs. Addl. CIT in [2020] 122 taxmann.com 267 (Delhi - Trib.) has treated M/s Persistent Systems Ltd. as comparable in software development services segment only. However more relevant are the comments about profile of Persistent Systems Ltd, which has been mentioned in para 115 to 118, and for ready reference is reproduced below:- 15. In case of Persistent Systems, limited Id AR submitted that Persistent Systems Ltd. is engaged in the business of development and sale of software products and therefore, cannot be regarded as comparable to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service tax and value added taxes (VAT) on behalf of the government and, therefore, these are not economic benefits flowing to the Company. Hence, they are excluded from revenue. 18. At note no 21 Page No 181 of Standalone Financial statements it has only one stream of Revenue i.e. Sale of Software services as under: 21. Revenue from operations (net) (In Million) For the year ended March 31, 2014 March 31, 2013 Sale of software services 11,841.16 9,967.51 Therefore, we do not agree with the arguments of the assessee, and hold that Persistent System Ltd. does not sale products, but it is engaged only in sale of software services. No other reasons were given to us for its exclusion; hence, we are of the view that Persistent system has rightly been included as Comparable company by Id DRP and TPO. 26. Thus this company is clearly held to be involved in sale of software services only and not in sale of software products. Also in the case of Motherson Sumi Infotech and Design Ltd. vs. ACIT 112 Taxmann.com 300 (2019) again this company was held to be involved in software services only. The para 32 of the Hon'ble ITAT order is very pertinent and reproduced below for ready reference:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned below:- (ii) Segmental information not available:- the segmental information is available in para 27/page 407 o f PB, wherein it is clearly mentioned that company provides Software services only in 3 sectors namely Telecom + Wireless, Life sciences + Healthcare and in frastructure + Systems. As the software services are treated as a common and single segment only by the assessee company, accordingly the assessee has treated it as single segment only. Thus the assessee contentions about no segmental in formation are wrong and deserves to be rejected. (iii) Occurrence of extraordinary event/The assessee has also alleged opening of new offices by M/s PSL. a. Acquisition of Cloud Squads. The PSL has acquired clouds Squads only in February 2014 (i.e. only in the end) and it is small company and the assessee has failed to mention the impact on financials /P L on such acquisitions. Also the allegation that assessee has opened new branch offices in Germany and South Africa will at best have negative impact on P L. because it is a established fact that whenever new offices are opened initially it has negative impact on pro fits because it takes time to stabilize the business activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PSL is functionally similar and also comparable on all parameters/aspects to the assessee company. 30. The Id. AR rebutted the submissions of the Id. DR. The salient features of the arguments of the Id. AR are as under: While rejecting exclusion of Persistent Systems, the Hon'ble Tribunal in Steria's case has held that the said company is only into software development, however, did not consider the fact the company in its audited financials at page 164 (refer pg 432 of the annual report compilation), under Note 1: Nature of operations, itself classified as global company specializing in software products, services and technology innovation. The Company offer complete product life cycle services. 31. The Id. AR argued that the following arguments was never presented before the Bench while dealing the case of Steria (supra). Revenue from time and material engagements is recognized on time proportion basis as and when the services are rendered in accordance with the terms of the contracts with customers. In case of fixed price contracts, revenue is recognized based on the milestones achieved as specified in the contracts, on proportionate completion basis, Revenue from royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er making in depth analysis of the financial of the M/s Infobeans Technologies Ltd. has upheld the inclusion of this company with M/s Velocity Tech- SOL India Ltd. with regard provisions of software development services to its AEs. Relying on the above noted decision and also considering several decisions of Hon'ble Tribunals, again the Hon ble Delhi ITAT in the case of Agilent Technologies (International) Pvt. Ltd. Vs. DCIT, Circle-1(1), Gurgaon in ITA No.727/Del/2019 for A.Y.2015-16 has compared this company has functionally comparable to the companies providing software development services to its AEs. The above noted written submission may kindly be taken on record. 33. Considered the rival submissions and material placed on record. With regard to ground no. 2 and its sub-grounds, we observed that the assessee objected to treatment of Foreign exchange gain/loss as non operative in the case of the assessee and also the comparables selected were having the Forex impact, which was grossly ignored by the tax authorities. After careful consideration, we observe that the revenue model of the assessee is that they are wholly owned subsidiary of Nokia Corporation and is primarily e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r loss to the assessee. This findings is based on the submissions that the transactions are only with the AE s and any other transaction not involving the AEs, may be claimed as operating expenditure, as the risk factor is mitigated only with the transactions with AE. Therefore, all the transactions are recorded by the assessee are only relating to transactions with its own AE. Hence, we are inclined to agree with the findings of tax authorities. 33. With regard to relying on the Safe Harbor Rules by the revenue, the assessee objected by submitting that as per Rule 10TB and 10TC, the assessee has to be a eligible assessee as well as it is applicable only to eligible international transactions. We observed that the DRP has not applied any rules to determine the assessee as eligible assessee. It just referred to the definition of operating expenses to explain the operating revenue and expenses have to have a forex fluctuation risk, otherwise, it cannot be considered as part of operating revenue or expenditure. Therefore, the relevant ground is rejected. 34. With regard to contention that inconsistent approach adopted by the TPO in considering exchange/loss as operating in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and accordingly dismissed the ground no. 2.4.1 raised by the assessee. 37. Coming to the next issue of exclusion of two comparables selected by the TPO relating to Whirlpool and Penguin Electronics, we observed that it was submitted that both the comparables are functionally dissimilar with the submission that they are engaged in the manufacturing and trading of home appliances, kitchen appliances and other products which are different to the business of manufacturing mobile phones and accessories. They also own intangibles and R D facilities by incurring substantial expenditure. Whereas in the case of the assessee, it is merely relating to mobile phones and R D division is separate division having separate profit centre. On the other hand, Ld DR objected vehemently submitting that this issue was not raised before lower authorities. 38. Considered the rival submissions and material placed on record. We observe that the assessee is exclusively engaged in the manufacturing, trading of mobile phones. The functions in manufacturing, pricing, branding etc are unique to the mobile phones and its accessories. It cannot be generalized with any of the home appliances or kitchen appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r note 27, export of goods/services were calculated on FOB basis, thus the company was engaged in sale of products. The learned counsel referred to page 742, which is website details of the company and submitted that the company was engaged in providing diversified services. The learned counsel relied on the decision of the Delhi bench of the Tribunal in the case of Xchanging Technology Services India Pvt. Ltd. Vs DCIT, Circle-27(2), New Delhi, ITA No.1222/Del/2015 (Assessment Year: 2010-11), wherein it is held that the company cannot be accepted as comparable in absence of sufficient financial information. 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. We find that the Note 27 of the annual report has provided details of earning in foreign exchange, which mentioned that export of goods/services amounting to Rs. 32,96,59,883/- have been calculated on FOB basis. The Note 20 of the annual report mention revenue from operations earned on sale of software (export) amounting to Rs. 32,96,59,883/-. Thus, in view of the Note 27, the quantum of export of the goods and export of the services cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, it is held as under: 11. The first objection which has been raised by the assessee is against the inclusion of the concern, Persistent Systems Ltd. The annual report of the said concern is placed at pages 183 to 260 of the Annual Report Compilation. The Revenue has been shown from operations and the said concern has recognized sale of software services at Rs. 11,841 million. The said company in the notes formingpart of financial statements under the head 'segment information had reported as under:- 26. Segment Information The company's operations predominantly relate to providing software products, services and technology innovation covering full life cycle of product to its customers. The primary reporting segments are identified based on review of market and business dynamics based on risk and returns affected by the type or class of customers for the services provided which are as follows:- a. Telecom and Wireless b Life science and Healthcare c Infrastructure and Systems 12. The segmentals of the said division are not available and in such facts and circumstances where the concern picked up had different functional profile, the margins of the said concern cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R D Activities, also there is no segmental data available and declared High Turnover. After considering the submissions of both the parties, we observe that the Coordinate Bench in the case of Avaya India P. Ltd (supra) and Alcatel Lucent India Ltd (supra) held as under: 9.3 We have heard the rival submission of the parties. The various segments mentioned in the annual report comprises of manufacturing, BFSI, hi-tech, travel and transportation and others, but the assessee is primarily engaged in providing global software development in these areas. In the background to significant accounting policies, however, mention other services offered by the company which also include business process management, business technology consulting, cloud, digital businesses, independent testing, infrastructure management services, product engineering and SAP services. The company also own intellectual property rights as pointed out by the learned counsel as against no intellectual property rights owned by the assessee, and thus, assets of the company cannot be compared with the assessee. In view of functional dissimilarity as well as the difference in the assets owned by the company vis- -vis the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the treaty partner jurisdictions, and agreements are to be interpreted as they exist and not on the basis of what ideally these agreements should have been. (g) A tax treaty protects taxation of income in the hands of residents of the treaty partner jurisdictions in the other treaty partner jurisdiction. Therefore, in order to seek treaty protection of an income in India under the Indo French tax treaty, the person seeking such treaty protection has to be a resident of France. The expression resident is defined, under article 4(1) of the Indo French tax treaty, as any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature . Obviously, the company incorporated in India, i.e. the assessee before us, cannot seek treaty protection in India- except for the purpose of, in deserving cases, where the cases are covered by the nationality non-discrimination under article 26(1), deductibility non-discrimination under article 26(4), and ownership non-discrimination under article 24(5) as, for example, article 26(5) specifically extends the scope of tax treaty pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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