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Page 13 of 34 IT(TP)A 160/Bang/2016 & IT(TP)A 211/Bang/2016 A. Y : 2011 – 12 2.5. Ld.TPO thus computed proposed adjustment being difference between the margins towards arm’s length price of the transactions as under: Particulars Proposed Adjustment Software Development Service Segment Rs.2,86,12,979/- Marketing Service Segment Rs.4,08,83,190/- 2.6 Aggrieved by proposed adjustment, assessee raised objection before DRP. DRP upheld objection regarding inclusion of certain comparables under Software Development Segments. DRP upheld objections raised by assessee in respect of certain comparables, and up held the rest under both segments. 2.7 Against directions of DRP Ld.AO, passed final assessment order, against which both assessee as well as revenue are in appeal before us.
3. At the outset Ld.AR submitted that, in revised grounds of appeal, Assessee seeks exclusion/inclusion of following comparables under both segments: A. Software Development Segment A.1 Comparable Sought for Exclusion: • Persistant Systems & Solutions Ltd., • Persistant Systems Ltd., • Sasken Communication Technologies A.2 Comparables sought for Inclusion: • Evoke Technologies Ltd., • R.S.Software (India) Ltd., B. Sales and Marketing Support Services B.1 Comparable Sought for Exclusion:
Page 15 of 34 IT(TP)A 160/Bang/2016 & IT(TP)A 211/Bang/2016 A. Y : 2011 – 12 (a) computer programming and research and development services; and, (b) sales and marketing services.
Contract free payable by AEs to assessee will be computed as under: (a) cost +12% basis on computer programming and research and development services; and, (b) cost +10% on sales and marketing services. (c) It is also been agreed by the parties that for the purposes of computation of cost, shall include all cost reasonably and necessarily incurred by assessee in performance of their services under the MSA and shall be such as are determined in accordance with generally accepted accounting principles in India including depreciation, ordinary amortisation and extraordinary expenses but excluding capital costs and income tax.
It is also been agreed between the parties that all information including specifications, designs, drawings, results from computer programs and any software that may be developed during the course of work and during the tenure of the contract shall be exclusively the property of associated enterprises and it shall retraining absolute right or any patents, copyrights, trade secrets that may emerge from the results of the work carried out under the contract.
The contract between the parties shall remain in force unless terminated by either party thereto.
Page 17 of 34 IT(TP)A 160/Bang/2016 & IT(TP)A 211/Bang/2016 A. Y : 2011 – 12 into system development and supports associated enterprises in marketing. 3.3.2 Risks assumed: Assessee has identified manpower risk to be the risk to which assessee is exposed. It has been submitted that all other risk like operational risk, market risk, product liability risk, foreign exchange risk, idle capacity S, receivable collection or credit risk are all born by the associated enterprises. 3.3.3 Assets employed: Except for routine assets like computers furniture’s and fixtures are owned by assessee, all or any intellectual property rights that gets developed in the process of software development and/or research services are owned by the associated enterprises. 3.3.4 Characterisation: Based on above FAR analysis under both segments, assessee can be characterised as contract service provider, for software development and Marketing support service segment, that assumes less than normal risk associated with carrying out its business. Assessee’s appeal: 4. Ground Nos. 1-3 are general in nature and therefore do not require any adjudication.
Ground Nos. 4-6: Ld.AR submitted that assessee wishes to challenge inclusion of 3 comparables on the basis of functional dissimilarities, being ; Software Development Service Segment (For exclusion) • Persistent Systems and Solutions Ltd., Page 19 of 34 IT(TP)A 160/Bang/2016 & IT(TP)A 211/Bang/2016 A. Y : 2011 – 12 Ld. AR submitted that, there is lack of segmental accounting in financials of this company. He also submitted that, there are no bifurcations between services rendered by this company. Is has been submitted that, this Tribunal while considering this comparable for year under consideration in various cases observed that, during relevant year, this company developed its own software products, and its revenue included licensing of software products. Ld. CIT-DR submitted that, this company is into software services and products. And segmental accounting of software services and products are available for year under consideration. We have perused submissions on the basis of records placed before us. It is observed that, assessee developed software during the year, and has earned royalties from sale of products. This Company also earned revenues from Licensing of products. It is also observed from the notes to the accounts of this company that the segmental information is provided on consolidated financial statements. It is also observed that this company owns software developed by it, on which depreciation is claimed. Thus, this company has been characterised itself as engaged in providing outsourced product development services to independent software vendors and enterprises. It has been characterised to having earned significant portion of its revenues from export of software services and products. Thus function, the assets owned by this company and risk assumed are not comparable with that