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Before: Shri Amit Shukla & Shri L.P. Sahu
In the Income-Tax Appellate Tribunal, Delhi Bench ’I-2’, New Delhi
Before : Shri Amit Shukla, Judicial Member And Shri L.P. Sahu, Accountant Member
ITA No. 2544/Del/2014 Assessment Year: 2009-10
Giesecke & Devrient (India) vs. DCIT, Circle 12(1), Private Ltd, Plot No. 57, Sector-44, New Delhi. Gurgaon PAN- AABCG 4223D (Appellant) (Respondent)
Appellant by Sh. Deepak Chopra, Adv. Sh. Harpreet Singh Ajmaini, Adv. Sh. Rohan Khare, Adv. Respondent by Sh. H.K. Choudhary, CIT/DR
Date of Hearing 08.01.2019 Date of Pronouncement 29.03.2019
ORDER Per L.P. Sahu, A.M.: This appeal by the assessee is directed against the final Assessment Order dated 31.03.2009 passed under section 143(3) r.w.s 144C of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for the assessment year 2009-10 on the following grounds :
Transfer Pricing [Rs. 80,430,576] 1. On facts and in law, the order under section 143(3) read with section 144C of the Act passed by the Ld. AO is void-ab-initio and infructuous and is liable to be quashed as the said order is in violation of section 144C(10), (13), (5) of the Act, in so far, as it is contradictory to and ignorant of the directions issued by the Hon’ble DRP.
SIM Card Assembly Segment [Rs. 69,819,061]
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On facts and in law, the Deputy Commissioner of Income Tax, Circle 12(1), New Delhi (“Ld. AO”) [along with the Additional Commissioner of Income Tax, Transfer Pricing Officer - 1(2), New Delhi (“the Ld. TPO”) - under reference from the Ld. AO] erred in determining and the Hon’ble Dispute Resolution Panel (“Hon’ble DRP”) erred in partly confirming the addition of Rs. 69,819,061 to the total income of the Appellant on account of the difference in arm’s length price of the international transactions pertaining to SIM card assembly segment of the Appellant. 3. Without prejudice to Ground 1, on the facts and in law, the order of the Ld. AO is erroneous to the extent of not incorporating the binding directions of the Hon’ble DRP that the adjustment should be restricted only to the transactions with the AEs which results in relief of Rs. 33,095,760, while finalizing the order section 143(3) read with section 144C of the Act. 4. On the facts and in law, the Ld. TPO, Ld. AO and Hon’ble DRP erred in computing the profit margin of whole SIM card segment thereby contravening the provisions of Rule 10B( 1 )(e)(i) of the Rules which necessitate the computation of net profit margin realised by the Appellant only from its international transactions with the AEs. 5. On facts and in law, the Ld. TPO, Ld. AO and the Hon’ble DRP erred in applying the profit margin of comparable companies to that of the Appellant without taking into account economic & commercial reasons and factual data to support the losses incurred in the SIM card assembly segment. 6. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon’ble DRP grossly erred in not allowing appropriate adjustments in accordance with the provisions of Rule 10B(l)(e)(iii) and 10B(3) of the Rules to account for difference in working capital employed between the Appellant and the comparable companies selected by the Ld. TPO.
Software Development Segment [Rs. 10,611,515] 7. On facts and in law, the Ld. TPO, Ld. AO erred in determining and the Hon’ble DRP erred in partly confirming the addition of Rs. 10,611,515 to the total income of the Appellant on account of the difference in the arm’s length price of international transactions pertaining to software development segment.
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Without prejudice to Ground 1, on the facts and in law, the order of the Ld. AO is erroneous to the extent of not incorporating the binding directions of the Hon’ble DRP that the working capital adjustment under Rule 10B(l)(e) for the purpose of determination of the ALP and the corrected margins of the comparables should be considered which results in relief of Rs. 2,158,799 while finalizing the order section 143(3) read with section 144C of the Act. 9. On facts and in law, the Ld. AO/ Ld. TPO erred in violating the provisions of Rule 10B(2) of the Rules by rejecting certain comparable companies identified by the Appellant in its TP documentation using arbitrary reasons/ filters. 10. On facts and in law, the Ld. AO/ Ld. TPO erred in violating the provisions of Rule 10B(2) by introducing new companies without considering the differences in the functions performed, assets employed and risks assumed by such companies vis- a-vis the Appellant, thereby resorting to cherry picking of comparables. 10.1 Infosys Technologies Ltd. (Functionally not comparable to the Appellant) 10.2 Sonata Software Limited (Failing filter of related party transactions to total sales applied by the Ld. TPO)
10.3 Kals Information Systems Limited (Failing filter of employee cost to total sales applied by the Ld. TPO and Functionally not comparable to the Appellant)
10.4 Bodhtree Consulting Ltd. (Functionally not comparable to the Appellant and a super normal profit making company)
10.5 Comp-U-Leam India Ltd. (Functionally not comparable to the Appellant) 11. On the facts and in law, the Ld. TPO and Ld. AO erred in not allowing a risk adjustment to the Appellant, thereby contravening the provisions of Rule 10B( 1 )(e)(iii) of the Rules.
Use of Multiple Year Data 12. On facts and in law the Ld. TPO, Ld. AO and the Hon’ble DRP erred in using the data for the current year (i.e. financial year 2008-09) which was not contemporaneous and which was not available in the public domain at the time of preparing the TP documentation by the Appellant, thereby grossly misinterpreting the requirement of ‘contemporaneous’ data in the Rules to necessarily imply current year data, thereby breaching the principles of natural
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justice and ‘impossibility of performance’. 13. On facts and in law, the Ld. AO erred in determining and the Hon’ble DRP erred in confirming the adjustment of Rs. 3,475,925 to the total income of the Appellant on account of disallowance of payment of export commission under section 40(a)(ia) of the Act. 14. On facts and in law, the Ld. AO and the Hon’ble DRP erred in concluding that the payment of export commission by the Appellant can be treated as royalty/ fees for technical services under section 9(1) of the Act. 15. On the facts and in the circumstances of the case, the Ld. AO erred in levying interest under section 234B and 234D of the Act. 16. On facts and in law, the Ld. AO and the Hon’ble DRP erred on fact and in law in initiating penalty under section 271(1 )(c) of the Act.
The Appellant vide its letter dated 17.09.2018 has raised additional grounds which are as under:- Ground 5.1: That the TPO/AO/DRP erred in confirming Karnataka Hybrid Micro Devices Ltd. as a comparable without appreciating that the said comparable does not fulfill the FAR test. Ground 5.2: Without prejudice, even otherwise the said comparable was liable to be rejected since the TPO himself in the preceding as well as subsequent years has rejected the same as not being functionally comparable to the Assessee.
The brief facts of the case are that the appellant, Giesecke & Devrient India Pvt. Ltd. is a company registered under the Companies Act,1956 and was incorporated in 2001 as a 100 percent subsidiary of G&D GmBH with its corporate office at Gurgaon. For the year under consideration the Appellant was engaged in the business of trading Currency Verification and Processing Systems ("CVPS"), assembling and distribution of SIM Cards to the telecommunication service providers and in provision of software development services to its Associated Enterprises ("AE"). During the impugned year i.e. AY 2009-10 the
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Appellant filed its return declaring an income of Rs.14,69,61,812/-. Since the Appellant had entered into various international transactions, a reference was made to the Transfer Pricing Officer ("TPO") for determination of the arm's length price of the said transactions. Details of the international transactions undertaken by the Appellant during the year are as follows:-
S. No. NATURE OF TRANSACTION AMOUNT (In INR) 1. Import of CVPS Machines and spare parts 35,97,90,683/- (“Distribution Function”) 2. Import of Raw Material for SIM Card 24,92,08,505/- (“Assembly Function”) 3. Software Development 12,92,00,387/- 4. Sale of SIM Cards 16,91,24,839/- 5. Purchase of Fixed Assets 23,82,038/- 6. Provision of Installation Services 20,12,946/- 7. Service Expenses 1,74,11,881/- 8. Commission Expenses 70,98,795/- 9. Interest on External Commercial 85,73,598/- Borrowing 10. Repairs and Maintenance 25,09,155/- 11. Other Expenses 3,48,70,716/- 12. Reimbursement of Expenses 72,39,704/- 13. Receipt of Software Services 27,74,401/- 14. Service Charges 3,61,03,750/- 15. Gurantee Fee paid 25,94,083/- 16. Recovery of Expenses 28,03,221/-
The TPO for the above mentioned transactions picked up the transactions of Assembly of SIM card segment and the software development segment proposing to make adjustments to the same. For the software development segment the Appellant declared an OP/OC of 13.14% and selected 24 comparables with an average OP/OC of 14.23%. Hence the transaction was claimed to be at arm's length. The TPO during the transfer pricing proceedings proceeded to reject 15 of the 24 comparables selected by the Appellant in its TP study and hence accepted
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only 9 comparables from the list. Further, the TPO added 6 additional comparables to the list and the average OP/OC of the final 15 comparables was worked out at 22.43% thereby proposing an adjustment of Rs.1,06,11,515/-.
2.1 In the Sim Card segment the Appellant declared its OP/OC of 17.40% whilst selecting 5 comparables with an average OP/OC of 1.75% . It was submitted before the TPO that the loss was owing to various circumstances such as initial years of operation, high competition in the market, under utilisation of capacities etc. The TPO accepted the benchmarking analysis of the Appellant as it is. However, he refused to give adjustment with respect to low sales realization due to falling prices, stiff market competition led to decrease in prices of chips, under utilization of capacities and regulatory hurdles and also proportionate adjustment between AE and non-AE transactions and determined the adjustment being the difference between the margin of the Appellant as opposed to the comparables at Rs.6,98,19,061/-.
2.2 The AO vide its Draft Order dated 21.02.2013 confirmed the additions as proposed by the TPO. Additionally, the AO observed that the Appellant during the impugned year had made commission payments to its AE namely Giesecke & Devrient Egypt Services LLC ("G&D Egypt"). The Appellant submitted before the AO that the said payments were in the nature of commission for forwarding of orders and since the services were rendered outside India, being non managerial/technical/consultancy in nature, the Appellant was not liable to deduct tax at source and hence no disallowance U/S 40( a)(i) of the Income Tax Act, 1961 was warranted. The AO however disregarding the submissions of the
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Appellant, held that the payment of commission was in the nature of "Fee for Technical Services" U/s. 9(1)(vii) of the Act and hence made a disallowance of INR 34,75,925/- U/s. 40(a)(i) of the Act. Hence the income of the Appellant was assessed as follows:-
S.No. Particulars AMOUNT (In INR) 1. Income as Declared by the Assessee 14,69,61,812/- 2. Additions :- 3. Transfer Pricing adjustment . by the TPO 8,04,30,576/- 4. Addition on account of Export 34,75,925/- Commission 5. Total Income 23,08,68,313/- 6. Rounded Off 23,08,68,310/-
2.3 Aggrieved with the Draft Assessment Order, the Appellant preferred to file objections before the Dispute Resolution Panel ("DRP"). The DRP vide its directions dated 24.12.2013 gave partial relief to the Appellant as follows:-
(i). Contentions against exclusion of comparables in the software segment were rejected. (ii). Plea for working capital adjustment was granted (iii). Plea regarding correction of margins was acceded to (iv). Capacity adjustment for the SIM card segment was rejected. (v). Proportionate adjustment in the SIM card segment allowed (vi). Corporate tax addition u/s 40(a)(i) was confirmed.
2.4 The AO passed the Final Assessment Order dated 16.01.2014 confirming the additions as made in the Draft Order dated 21.02.2013 in complete disregard to the DRP Directions dated 24.12.2013. The TPO thereafter passed an appeal effect order dated 27.02.2014 whereby the adjustments in the TP segments were recalculated as under:-
S.No. Descriptions Adjustment (In INR)
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Software Development Services 1,26,56,171/- 2. SIM Card Assembly Segment 3,51,35,021/- 3. Total Rs. 4,77,91,192/-
Aggrieved with the Final Assessment Order dated 16.01.2014 the Appellant preferred an appeal before the Tribunal.
2.5. Thereafter, the Appellant filed a rectification application before the TPO pointing out certain calculation errors in the margins of the final set of comparables for the Software Development Segment. The TPO vide its order dated 22.06.2015 acceded to the Appellant's request and recomputed the margins as follows thereby reducing the adjustment to Rs.87,93,902/-
S. No. Descriptions Margin (OP/OC) % 1. Akshay Software Technologies Limited 12.90 2. Bodhtree Consulting Ltd 67.81 3. Comp-U-Learn Tech Ltd 22.28 4 Infosys Ltd. 39.27 5 Kals Information Systems Ltd. 32.35 6 LGS Global Ltd 15.70 7 Larsen & Toubro Infotech Ltd 17.92 8 Mindtree Ltd. 4.25 9 Persistent System Limited 16.83 10 RS Software India Ltd. 11.06 11 Sasken Communication Technologies Ltd. 15.90 12 Sonata Software Limited 29.83 13 Tata Elexi Ltd. 20.29 14 Thirdware Solution Ltd. 21.04 15 VGL Softech Ltd. -14.72 Average 20.85
Finally, the AO recomputed the ALP of Software Development Segment as under :
S. No. Particulars Amount (INR) 1. Operational cost 11,41,86,424 2. Arm’s Length Price at margin of 20.85% 13,79,94,290
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Price received 12,92,00,388 4. 105% of price received 13,56,60,407 5. Adjustment u/s. 92CA 87,93,902
Thus, total adjustment made by the AO in both the segments stood as under, which have been challenged by the assessee in this appeal :
S. No. Description Adjustment 1. Software Development Services 87,93,902 2. Sim Card Assembly Segment 3,51,35,021 Total 4,39,28,923
The Appellant is challenging inclusion of 5 comparables by TPO out of the above mentioned 15 comparables namely Bodhtree Consulting Ltd., Comp-U- Learn Tech Ltd., Infosys Ltd., Kals Information Systems Ltd. and Sonata Software Ltd. on the following written submissions made before us :
BODHTREE CONSULTING LIMITED {"Bodhtree"} 11.1. Bodhtree was rejected by the Appellant in its TP Study as not being functionally comparable to the functional profile of the Appellant. The TPO however disregarded the contentions of the Appellant and held that Bodhtree was primarily into software development, hence added the same to the final list of comparables. (Refer Pg. 23 to 24 of TPO Order).
The said comparable was objected to before the DRP (Refer Pg. 82 to 85 of Objections), however, the DRP rejected the Appellant's contentions for exclusion of Bodhtree. (Refer Pg.14 of DRP Directions).
The appellant is challenging the exclusion of Bodhtree as a comparable on the following points :-
20.1 Functionally Different - It is respectfully submitted that Bodhtree is an end to end service provider which provides IT Consulting and product engineering services including business activities like data warehousing and data management. It has only one segment namely software development, however, under one umbrella it is providing open and end to end web solutions, off shoring data management, data warehousing, software consultancy, design and development of solutions whilst utilising the latest technology. (Refer Pg. 12 of Annual Report).
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20.2 Insufficient Segmental Details - Bodhtree deals in wide array of services and products there is no segmental data of revenue or costs between the said services. (Refer Pg. 28 of the Annual Report)
20.3 Abnormal Growth - Additionally, Bodhtree during the impugned year had an abnormal growth of 67% in comparison to the preceding year. (Refer Pg. 1 of the Annual Report)
20.4 Bodhtree follows a different revenue recognition model as compared to the Appellant.
20.5 Additionally, it is pertinent to mention that the said comparable has been rejected as not being functionally comparable to the Appellant in the Appellant's own case for the preceding year i.e. AY 2008-09 by this Hon'ble Tribunal vide its order dated 23.08.2018. Hence, there being no change in the profile of Bodhtree between AY 2008-09 and 2009- 10, the said comparable is liable to be rejected.(Refer Pg. 15 to 20 of the Tribunal Order)
The Appellant would also like to place reliance on the co-ordinate bench's decision in the case of Cadence Design Systems (India) Pvt. Ltd. v DCIT, ITA No. 2074/Del12014 (for the same assessment year, i.e., AY 2009-10) wherein this Hon'ble Tribunal has categorically held that Bodhtree being an end to end service provider dealing in software products as well, cannot be held to be functionally comparable to a captive software development company. The relevant extract of the findings of Tribunal in the case of Cadence Design (supra) is reproduced hereunder for ready reference: "6.4 We have heard the rival submissions and perused the relevant findings given in the impugned order as well as the material referred to before us. As discussed earlier, the assessee under the provision of software research and development services carries out R&D services for its AE for the development of software products to its CDS utilizing R&D technology of CDS only. CDS specifies R&D services to be performed; products to be developed or used; time line for completion and specific result to be achieved. The entire conceptualizing of the marketing strategy for sales of its products and services, securing of orders of its products are done by CDS and not by the assessee. The assessee company is purely a 'captive service provider' and does not undertake any kind of marketing or development functions. Conceptualization of services and determination of exact scope of work, which is to be performed by the assessee, is responsibility of CDS. Even the quality control, testing of the products is all done by CDS. Now, if we analyze the functions of the assessee, which is purely R&D being a captive unit vis-a-vis the functions of Bodhtree, we find that this company is into IT consulting and product engineering service and has a wide array of business activities like data warehousing and data management. It has only one segment namely, software development and being a software solution company, it is engaged in providing open and end-to-end web solutions, off shores data management and data consultancy design and development solution. Such functions, though may be said to be carried out by the AE i.e. Cadence, but it cannot be said that similar functions have been performed by the assessee. Even on the risk analysis, the comparability fails as assessee is purely risk mitigated company as discussed above. We find that there are catena of decisions of various Benches of the Tribunal like in case of Cisco Systems India (P.) Ltd. v.
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Dy. CIT [20I4} 66 SOT 82150 taxmann.com 280 (Bang.), wherein it was held that this company is rendering software business of developing software products and is providing open and end-to-end web solution, software consultancy and design and development of software and the same cannot be held to be comparable with the companies, which are purely into software development services and not into software products. Apart from that, in the case of Fiserv India (P.) Ltd. (supra), this comparable has been excluded after considering various decisions of the Tribunal. Coming to the arguments of the ld. Sr. D.R. that during the course of search analysis, the assessee too has chosen the companies by adopting search criteria of company into 'software products' and therefore, the assessee now is precluded from making a distinction that software product companies should be excluded. In our opinion, such a contention of the ld. Sr. DR cannot be accepted, because selection of comparables by using any search criteria is one of the process of shortlisting the companies by applying various quantitative and qualitative filters in the wide array of companies in the data. Once in the search process, certain companies are thrown in the search result, then it is incumbent that deep FAR analysis is to be done so as to carry out proper comparability analysis with the tested party so as to benchmark and arrive at a proper Arm's Length Price. If at the functional level, it is shown that functions performed by the assessee is entirely different from the functions carried out by the comparable companies, or it does 8 found comparable either under risk analysis or assets deployed, then such comparable companies should not be excluded from comparability analysis. Accordingly, we hold that Bodhtree cannot be included as comparable for benchmarking the assessee 's margin. " 22. Reliance is also placed on the following decisions for the same Assessment Year (AY 2009-10) wherein Bodhtree has been excluded as not being functionally comparable to a captive software developer. i. Finserv India Pvt. Ltd. v ITa, [2015] 60 taxmann.com 48 (Delhi-Trib) ii GE Convertam EDC Pvt. Ltd. v ACIT, [2017] 79 taxmann.com 408 (Chennai- Trib) iii. OSI Systems Pvt. Ltd. v DCIT, [2016] 66 taxmann.com 109 (Hyderabad-Trib) iv. Syncheron Technologies Pvt. Ltd. v JCIT, [2016] 71 taxmann.com 245 (Pune- Trib) 23. Hence, it is prayed that in view of the above arguments, Bodhtree cannot be taken as a comparable and is liable to be rejected.
On the other hand, the ld. DR submitted that Bodhtree Consulting Ltd. is a suitable comparable which has been rightly selected by the TPO. From the annual report of the above company, it is clear that the company is engaged only in the Software Development Services. In the notes to accounts, the auditor has categorically mentioned at Sl. No.5 under the head ‘segment information’ that there is only one segment, i.e., software development services. The profit and loss
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account shows that the company has shown revenue from sales only. Inviting our attention to the decision of Tribunal in the case of assessee for assessment year 2008-09, the ld. DR submitted that the Tribunal though excluded the above comparable from the final set of comparables, but has also referred to the decision of Hon’ble Delhi High Court in the case of Saxo India (ITA No. 682/2016, wherein it has been categorically observed that a company engaged in providing software Development service cannot be regarded as a fit comparable to the company engaged in providing both software development and software product services. In the present case, the assessee as well as Bodhtree Consulting Ltd. (Bodhtree) are found engaged only in one segment, i.e., software development Services. Nowhere in the annual report or director’s report of M/s. Bodhtree, is it mentioned that the company is in the development of products. The confusion has arisen only on account of the narration mentioned in the Revenue segment which has been described as local sales and export sales. The sale here denotes income from software development services. Further, there is no opening and closing stock inventory of any product in the final accounts of the comparable, namely, Bodhtree. Further, ld. DR submitted that in the present case, assessee is also engaged in complex software development services which includes web services, e-business, communication infrastructure (page 357 of the paper book). Further, assessee supports in the entire gamut of Government solution business unit, which includes capturing data for ID specific identifying characteristics to delivery of personalized cards as per page 390 of the paper book which is basically entire gamut of IT services and IT scrutiny systems. Further, in the TP study, there is no separation of role of assessee and its AE for discharging overall function. Still further, as per page 110 of the paper book, which is part of the transfer pricing study, there is no separate role of the assessee mentioned under the head software development services so as to ascertain what specific services
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are performed by the assessee in the overall functions of the group. Therefore, this comparable has rightly been included by the TPO.
After hearing both the sides and perusing the entire materials available on record, we observe that the segment-wise and product-wise performance of Bodhtree as mentioned in director’s report is as under :
“Bodhtree has only one segment, namely, software development. Being a software solutions company, it is engaged in providing open and end-to-end web solutions, Offshoring data management, data warehousing, software consultancy, design and development of solutions, using the latest technologies.
On perusal of Profit and loss account of Bodhtree, the Revenue is generating only from sales which is basically service income in absence of any supporting figures in respect of separate software product. Further, there is no opening and closing figures for any software product/purchase of software product. In the entire annual report and Director’s report, there is no mention of development of product by this company. In the director’s report Annexure-3 page No. 12, it is stated that there is only one segment, namely, software development and the company is only a software solution company and is engaged in providing open and end-to-end web solutions. This statement further supports that the company is not engaged in developing separate software product but only in providing software development services and solutions.
As far as veracity of software services provided by Bodhtree, the transfer pricing study alongwith annexures have been perused. Transfer pricing memorandum is contained from page 100 to 330 of the paper book as per annexures of the paper book. On page No. 110 under the software development
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segment (para 1.3), there is no specific function mentioned in the said segment performed by the assessee vis a vis the group functions. For the sake of clarity, the functions under the software development services as contained in para 1.3 are reproduced as under :
1.3. Software development During FY 2008-09, G&D India has provided software development services to G&D GmbH, Giesecke & Devrient America Inc. (“G&D America”) and Giesecke & Devrient Asia Pte. Ltd. (“G&D Asia”). We compared the net cost-plus mark-up (“NCP Margin”) that G&D India derived from its software development function with the arm’s-length results achieved by independent companies that perform similar software development functions to those of G&D India. The three-year weighted average NCP margin earned by broadly comparable independent companies range from (-) 1.77 percent to 28.52 percent with an arithmetical mean of 14.23 percent.
Further, on pages 164 & 165 of the paper book para 4.3.1, the functions under the software development are reproduced as under : 4.3. Software Development 4.3.1. Functions G&D India renders software development services to G&D GmbH wherein it develops applications software(s) for G&D GmbH. In this regard, G&D India has entered into a ‘software development agreement’ effective from December 12, 2005. G&D India is primarily engaged in the following software business: • Development of software for the Smartcard module, which is sold to G&D GmbH. The chip set module software is developed as per the general requirements of the markets and is primarily developed for G&D GmbH. About 90 percent of the total development activity relates to the development of software used as a part of the Smartcard module and is sold as a part of the smartcard. The software development process for the development of the chip set module is further explained the following parts. • Development of application software as per the specific requirements of the clients of G&D group. The services are offered to G&D GmbH and Giesecke & Devrient Asia Pte. Ltd. also, these services are provided to the sim card assembly division of G&D India. This accounts for about 10 percent of the total revenue.
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The functional roles with respect to the software development process are mentioned below: 4.3.1.1 Tole G&D India G&D India is engaged in the business of development of smart card related software. The software is built on Assembler C and Java using embedded software technology. The software developed is primarily used in the telecom segment (about 80 percent). The other verticals in which the company operates are banking and government solutions. The software developed by G&D India does not find any standalone application without the smartcards. The transfer of software happens through multi site data transfer systems. 4.3.1.2 Role of G&D GmbH G&D GmbH conceptualizes the need for a particular software application to be used in providing services to its end customers. G&D GmbH then defines the basic design of software, project content, delivery time, etc. for developing the particular software. The software so developed by G&D India is finally inserted by G&D GmbH in the smartcards. G&D GmbH is also responsible for the overall supervision of the software developed. G&D GmbH has defined the whole product Life Cycle (“PLC”) Procedure. The PLC procedure covers the entire development process from “cradle to grave”; it defines the major milestones which link multiple departments at G&D GmbH through reviews, hand off, etc. This procedure applies not only to new products, but also to products that require modifications, feature enhancements and new package options. The product Life Cycle is broken down into a tranditional phased approach. Each phase is made up of major deliverables and or milestones and these milestones are defined by G&D GmbH.”
A perusal of above functions reveals that the assessee in India is not only in software development of smartcard related software, but also operates in banking and government solutions. The software developed by the assessee is used in telecom segment. Therefore, the software development services- functions performed by assessee are multifarious and encompasses the broad functions of G & D group.
5.2 The functions of G&D group can be ascertained as per Global Transfer Pricing Policy for the group for 2007 as contained in page 331 to 406 of the paper
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book. Para 3.11 contains information technology functions of the group (357 of the paper book), which, inter alia, includes commercial solutions and logistics, technical solutions, e-business and web services, data centre, communication infrastructure and user support. Further, Government solution (GS) business unit is contained in page 390 of the paper book. Under this division, the product and solution are in respect of high market segments, i.e., travel documents, ID documents, Health, transit and security printing and brand protection. This unit is called GSGO division.
5.3 A perusal of these functions of the group read with the functions of the assessee as mentioned in the TP report discussed above proves that under the software development segment, the assessee company is not a merely routine software developer but assisting in the overall software development of the group which includes information technology services, such as technical solutions, e- business and web services, commercial solution and logistics, communication infrastructure etc. apart from various segments of Government solutions related to telecom sectors.
5.4 The documents filed before lower authority in support of exclusion of the comparable ‘Bodhtree’ have also been perused. Page 468 of the paper book contains the ground on which Bodhtree consulting Ltd. was sought to be excluded vide letter dated 31.05.2012 before the TPO. The reason for such exclusion is contained at Sl. No. 11 of the table of the said page 468 which is reproduced as under :
“The company is engaged in providing technology incubation, product engineering, business intelligence, Data Management, SOA consulting, CRM consulting Analytics, Data Warehousing, Share Point Consulting and product engineering as well as customized
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solutions and services in SOA, 8 PM, enterprise architecture, offshore advisory services, and e-commerce. As separate segmental information is not available, the company has been rejected.”
5.5 A perusal of reason sought for exclusion is firstly not on the basis of facts mentioned in annual report or director’s report, but the information contained in website of Bodhtree. It may be mentioned here that final accounts, audit report and director’s reports are authenticated documents submitted before the Regulatory Authority and website information cannot be relied to the extent of above final reports. The functionality of Bodhtree based on Director’s report, financial statements and assessee’s transfer pricing report has been established in earlier paragraph. Even if, we consider the submission of the assessee in respect of exclusion of Bodhtree as mentioned above on the basis of website of Bodhtree, then also the functions performed by the assessee is quite comparable with Bodhtree, as assessee is also in software development services performing wide range of services as mentioned above.
5.6 The ld. AR has relied on the decision of Coordinate bench in its own case for A.Y. 2008-09 (ITA No. 4924/Del/2012) where Bodhtree was excluded from the set of comprables. The said decision has been perused. However, it is seen that the decision in earlier year was taken mainly on the ground that Bodhtree is a product company and performs wide range of software development solution. However, the detailed analysis of the financial statements, Direcotr’s report and transfer pricing study of assessee and the group are not available in the said order. In the present case, after examining the above statements and records, the function of the assessee is found similar to Bodhtree. Therefore, this Bodhtree has
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rightly been considered as a good comparable to the assessee and assessee’s contention for exclusion of this comparable is not found tenable hereby.
In order to challenge the inclusion of Comp-U-Learn Tech Ltd., the ld. AR of the assessee submitted as under :
COMP-U-LEARN TECH LTD. ("Comp-u-learn") 24. Comp-u-learn was also rejected by the Appellant in its TP Study as not being functionally comparable to the profile of the Appellant. The TPO however held that Comp-u-learn was functionally comparable and added the same to the final list of comparables. (Refer Pg. 24 to 25 of the TPO's Order). 25. Comp-u-learn was objected to before the DRP by the Appellant (Refer Pg. 86 to 88 of Objections) however the DRP rejected the objections of the Appellant and upheld inclusion of Comp-u-learn as a comparable. (Refer Pg. 15 of DRP Directions). 26. The appellant is challenging the exclusion of Comp-u-learn as a comparable on the following points :-
26.1. Functionally Different- Comp-u-learn is in the business of provision of IT Enabled Services, call centre and Business Process Outsourcing (BPO), institution training and strategic alliances etc. Additionally, the company deals in software development and software products (Refer Pg. 5 and 26 of Annual Report). 26.2. Insufficient Segmental Details- No segmental bifurcation between revenue from software development and products. (Refer Pg. 25 of the Annual Report).
Reliance is placed on the following judgments for the same Assessment Year (AY 2009-10) wherein comp-u-learn has been rejected as not being comparable to captive software developers.
i. Invesys Development Centre India Pvt. Ltd., [2015] 56 taxmann.com 49 (Hyderabad- Trib) ii. Kenexa Technologies Pvt. Ltd. v DCIT, [2014] 51 taxmann.com 282 (Hyderabad- Trib)
Hence, it is prayed that in view of the above arguments, Com-U-Learn cannot be taken as a comparable and is liable to be rejected.
The ld. DR, on the other hand, relied on the orders of the authorities below 7. and submitted that this company has rightly been included in the final set of
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comparable being functionally similar to the assessee. He also referred to the financial statement and submitted that the major part of the Revenue is generated from Software Development income. The company is also not engaged in the Software product services. No any material expenses have been debited and there is no opening and closing stock of software product. It is not clear from the financial statements that this company is engaged in other segments. Therefore, this company is suitable comparable to the assessee.
We have heard the rival submissions and have gone through the material available on record. From the submissions made by the assessee, it reveals that ITAT, Hyderabad Bench in the case of Invensys Development Centre India Pvt. Ltd. (ITA No. 383/Hyd/2014-A.Y. 2009-10 dated 13.02.2015) has considered this comparable and after proper analysis, remitted the case back to the file of AO/TPO holding as under :
“9.2 As far as Comp-U Learn Global Tech India Ltd. is concerned, ITAT, Hyderabad Bench in case of M/s Kenexa Technologies Pvt. Ltd. Vs. DCIT (supra) observed as under: “39. The assessee submitted before the DRP that Comp-U-Learn Tech India Ltd. was engaged in the development of new software (product development) (page 7 of the Annual Report) in ITES call centre and BPO services (page 11 of Annual Report). It was further submitted that schedule XIII of the Annual Report shows software development expenditure at only 25% of the total expenditure. The TPO extracted the 133(6) notice and held that the company has nil onsite revenue and satisfied all the filters applied by the TPO. We are of the opinion that some more analysis has to be done and we direct the TPO to look into the financial statement of the company and also provide an opportunity to the assessee to submit relevant details to substantiate its claim that Comp-U-Learn Tech India Ltd. is not a comparable company.” Consistent with the view expressed by the coordinate bench, we also remit the issue of comparability of this company to AO/TPO with similar directions.” In view of the aforesaid decision of coordinate Bench, the TPO is directed to make further analysis of this comparable from the financial statements of this company.
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The assessee is also directed to furnish complete details pertaining to this comparable so as to justify its claim that it is not a good comparable to the assessee. Needless to say, the assessee shall be given reasonable opportunity of being heard. Accordingly, this issue is allowed for statistical purposes.
The ld. AR of the assessee has made following written submissions to challenge the inclusion of Infosys Limited in the final set of comparables :
INFOSYS LIMITED ("Infosys") 29. Infosys was rejected by the Appellant in its TP Study as not being functionally comparable to the profile of the Appellant. The TPO however rejected the contentions of the Appellant and included Infosys in the final list of comparables. (Refer Pg. 25 to 26 of TPO Order) . 30. Exclusion of lnfosys was challenged before the DRP (Refer Pg. 77 to 81 of DRP Objections), however the DRP rejected the contentions of the Appellant and directed Infosys's inclusion in the final list of comparables.(Refer Pg. 15 to 16 of DRP Directions) . 31. The appellant is challenging the exclusion of Infosys as a comparable on the following points:
31.1 Functionally Different - This comparable is engaged in diverse operation and is an end to end solutions provider. Infosys deals in software products as well. Infosys is mainly into technical consultancy design, development, re-engineering maintenance, system integration, package evaluation and implementation and infrastructure management services. (Refer Pg. 12,41,47,65 and 71 of the Annual Report). 31.2 Significant R&D Expenses- Infosys undertakes extensive R&D unlike the Appellant. (Refer Pg. 19 and 20 of the Annual Report) 31.3 Infosys owns significant intangibles which is completely different from the Appellant (Refer Pg. 19 of Annual Report)
31.4. Insufficient segmental data between revenue/expenses from software services and products (Refer Pg. 65 and 80 of Annual Report). 31.5. Additionally, it is pertinent to mention that the said comparable has been rejected as not being functionally comparable to the Appellant in the Appellant's own case for the preceding year i.e. AY 2008-09 by this Hon'ble Tribunal vide its order dated 23.08.2018. Hence there being no change in the profile of Infosys between AY 2008- 09 and 2009-10, the said comparable is liable to be rejected. (Refer Pg. 29 to 31 of Order).
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The Appellant would also like to place reliance on the co-ordinate bench's decision in the case of Cadence Design Systems (India) Pvt. Ltd. v DCIT, ITA No. 2074/De1l2014 (AY 2009-10) wherein this Hon 'ble Tribunal has categorically held that a company like Infosys having huge scale of operations along with owning intangibles and looking at the extent of its R&D Expenses it could not be compared to a captive service provider. The relevant extract of the findings of Tribunal in the case of Cadence Design (supra) is reproduced hereunder for ready reference: 7.3 We have heard the rival submissions and perused the relevant finding given in the impugned order as well as material referred to before us. First of all, Infosys Technologies Limited is a giant enterprise with turnover of more than Rs. 20,264 crores. Its expenditure on R&D was Rs. 267 crores and it has huge brand value and significant intangible assets, which have been valued at approximately Rs. 1,34,478 crores. if these assets are to be compared with those of the assessee, it can be seen that it has 'nil' expenditure on R&D and no significant intangible asset. On this ground alone, various Benches of the Tribunal have held that Infosys Technologies Limited cannot be compared with small software companies, who are into contract software development services. A company like Infosys with mega operations and having significant assets and brand value and full-fledged risk taking entrepreneur developing and selling proprietary products cannot be held to be comparable with the captive service and contract software development companies as the comparability analysis fails on all the factors of FAR. The Hon 'ble Delhi High Court in the case of Agnity India technologies (P.) Ltd. (supra) made a comparative chart while dealing with similar comparative analysis, which for sake of ready reference is reproduced hereunder:-
Basic Particular Infosys Technologies Ltd. Assessee Risk Profile: Operate as full-fledged risk taking Operate at minimal risks entrepreneurs as the 100 percent services are provided to AEs
Nature of services: Diversified-consulting, application Contract software Contract software design, development service development, re- development services engineering and maintenance system integration, package evaluation and implementation and c business process management, etc.
Turnover: 20,264 crores 209.83 crores
Ownership Develops/owns proprietary products branded/proprietary like Finacle, Infosys, Actice Desk, products Infosys iProwe, Infosys mConnect. Also the company derives substantial portin of its proprietary products
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(including its flagship banking product suite ‘Finacle’)
Onsite v. Offshore As much as half of the software The appellant provides development services rendered by only offshore services Infosys are onsite (i.e. services (i.e. remotely from performed at the customer's location India) overseas) and offshore (50,20 per cent) than half of its service, income from onsite services
Expenditure on Rs. 80 crores. Rs. Nil (as the 1percent advertising/sales services are provided to promotion and brand AEs) building:
Expenditure on Rs. 236 crores Rs. Nil Research and development
Other 100 per cent
7.4 If we apply the aforesaid comparative criteria as laid down by Jurisdictional High Court, we find that the same would be applicable on the facts of the present case also and, therefore, respectfully following the judgment of the Hon'ble Delhi High Court (supra), we hold that Infosys Technologies Limited cannot be compared with the assessee-company, which is operating at minimal risk and is a contract software development service provider. accordingly, we direct the TPO to exclude Infosys Technologies Limited from the comparable list. 7.5 Coming to the arguments of the Ld Sr. DR that when assessee has chosen this comparable and was not disputed in earlier year, we find that similar contention of the revenue has been dealt by the ITAT Mumbai Bench in the case ofTata Power Solar Systems Ltd v. Dy. CIT [20147 62 SOT 93/41 taxmann.com 340, wherein Tribunal observed and held as under:- "Under the transfer pricing mechanism, a comparability analysis has to be undertaken for comparing the control transactions with an uncontrolled transaction. This is achieved by identifying potential comparables having similar functions that can stand the test of FAR analysis (i. e., functions performed, assets employed and risks assumed). The assessee is required to identify the comparables after carrying out roper search and undertaking FAR analysis. However, if the same has not been done properly then it has to stand the scrutiny of the taxing authorities. If, on a deep examination, it is found that the comparables chosen by the assessee do not stand the test of FAR analysis, requirement of the statutory
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provisions and correct selection of most appropriate methods, the same can be rejected. At the same time, if during the course of transfer pricing proceedings, if the assessee points out the cogent reasons and gives proper analysis as to why the comparables chosen by it were not correct, it cannot be said that the assessee is out rightly precluded from raising such objections. The ultimate aim of the transfer pricing provisions is to determine the appropriate ALP, which can be done only by bench marking with the proper comparables based on FAR analysis and under the prescribed methods. If in the course of the proceedings, it is found that certain comparables do not stand the test of functional analysis or for some other reasons, then Tata Power Solar Systems Ltd. the same should be excluded and we do not find any reason that they should to be included simply because the assessee had included the same initially. If the cogent reasons have been given by the assessee for excluding the same, the same should be considered. The initial onus or duty is cast upon the assessee to carry out the selection of proper comparables based on FAR analysis and by adopting suitable transfer pricing method and then analyse its transaction to show the correct arm's length result. Thereafter, it is axiomatic that the taxing authorities/TPO, should scrutinize the assessee's report on arm's length result and the entire process of arriving at the ALP, whether they are based on transfer pricing principles and statutory provisions or not. If he himself founds some irregularity or mistake in any of the process or the steps undertaken, then he is bound to correct in accordance with the settled principles and law. If the assessee points out some mistake or any irregularity in the arm's length result, then it is incumbent upon the TPO to examine and consider the same and if the assessee's contentions are found to be correct or tenable, then he has to accept the same. There cannot be estoppel against correct procedure of law and principles solely on account of acquiescence or mistake of the assessee. The TPO is required under law to analyze every comparables and then only determine the correct ALP based on proper comparability analysis. Thus, we do not find any merit in the contention of the Revenue that simply because the assessee has included these two companies then the assessee is debarred from objecting to the same, if there are strong and cogent reasons.” This ratio has now been upheld by the Hon'ble Bombay High Court in CIT v. Tata Power Solar Systems Ltd. [20171245 Taxman 93/77 taxmann.com 326 (Bom.). Thus, respectfully following the aforesaid ratio the contention raised by the Ld. Sr. DR is not accepted.
Reliance is also placed on the following decisions for the same Assessment Year (AY 2009-10) wherein Infosys has been excluded as not being functionally comparable to a captive software developer.
I. Finserv India Pvt. Ltd. vITO, [2015] 60 taxmann.com 48 (Delhi- Trib) II. OSI Systems Pvt. Ltd. v DeIT, [2016] 66 taxmann.com 109 (Hyderabad-Trib) lll. CIT v Agnity India Technologies Pvt. Ltd. (2013) 219 Taxman 26 (Del)
Hence it is prayed that in view of the above arguments Infosys cannot be taken as a comparable.
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The ld. DR, on the other hand, relied on the orders of authorities below and submitted that this is a good comparable to the assessee. High Turnover is not a good reason for exclusion of this comparable. This comparable also is engaged in the Software Development Services like assessee. In service Industry turnover does not play any significant role as far as the margins are concerned. There is no linkage, whatsoever, between the sales and the margins. The Objections raised by assessee are general in nature and no specific fact was brought on record to show that due to difference in turnover, comparables become non-comparable. It could not be demonstrated as to how the difference in turnover influenced the results of comparable.
After hearing both the sides and perusing the entire material on record, we find that in the assessment year 2008-09, on the identical facts, the co-ordinate Bench of Tribunal in the case of assessee itself has excluded this comparable from the final set of comparables. The findings reached by the Tribunal read as under : “3.2.23. The next comparable which is being agitated for exclusion by the assessee is Infosys Technologies Ltd. The said comparable was included by the TPO whilst holding that Infosys passes all filters and was, hence, comparable to the Assessee. Before us, the Ld. Counsel of the Assessee submitted that not only is Infosys an industry giant but it also spends heavily on its Research & Development (R&D) activities and owns significant intangibles. He took us through the Annual Report of Infosys to substantiate that there is significant difference in the scale of operations. Additionally, from the various pages of the Annual report, he showcased as to how Infosys was providing a wide array of services including software products, but insufficient segmental details were mentioned in the financials. 3.2.24. Per contra the Ld. CIT Departmental Representative placed heavy reliance on the order passed by the lower authorities. 3.2.25. We have heard the rival submissions and perused the relevant material on record. We notice that on similar set of facts coordinate Bench of Tribunal in the case of Nokia Siemens Networks India Pvt. Ltd. vs. ACIT in ITA No. 333/Del/2013, has excluded
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this comparable by observing as follows: ”78. This company is undoubtedly a corporate giant with its large scale of operations vis-a-vis the Assessee company; that it had a brand impact to determine the premium pricing; that it has a different model of revenue recognition. It is submitted on behalf of the assessee that this comparable has been rejected in Assessee’s own case in immediately preceding year, i.e. AY 200708 by the Tribunal on account of different risk profile, scale, nature of services, revenue ownership of branded/ proprietary products, onsite and offshore services etc. This fact is not contradicted by the revenue. 79. Further, the Assessee has placed reliance on Aircom (supra),in order to exclude this comparable company on the basis of its magnitude. The coordinate bench has rejected this comparable by making following observations:- “17.2. We have considered the rival submissions and perused the relevant material on record. It can be seen that the TPO has included this company in the list of comparables by rejecting the assessee’s contentions. The assessee is providing and assigning software services to its AE alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon’ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. in comparison with such factors prevailing in the case of Agnity India Technologies Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon’ble Delhi High Court held Infosys Ltd. to be non-comparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are similar to the extent that the extant assessee is also not owning any branded products and having no expenditure on R&D etc. When we consider all the above factors in a holistic manner, there remains absolutely no doubt that Infosys Technologies Ltd. is not comparable with the assessee company. Respectfully following the judgment of the Hon’ble jurisdictional High Court in Agnity India (supra), we hold that Infosys Technologies Ltd., cannot be treated as comparable with the assessee company. This company is, therefore, directed to be excluded from the list of comparables.” 80. The diversified activities of business, its deployment of capital, resources and the brand name make this company not comparable with the assessee and, therefore, this company has to be excluded from the final set of comparable companies for benchmarking international transaction related to software segment. ”
3.2.26. Respectfully following the view taken by the coordinate Bench, whilst, following the judgment of the Hon'ble Delhi High Court, as afore mentioned, we direct the AO/ TPO to exclude Infosys from the final list of comparables.”
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In view of aforesaid findings of the Tribunal, we are of the opinion that this comparable is not fit to be included in the final set of comparables, as done by the Authorities below. The AO/TPO is directed to exclude this comparable.
In respect of next comparable, i.e., Kals Information Systems Ltd., the ld. DR has submitted as under :
KALS INFORMATION SYSTEMS LIMITED {"Kals"} 35. Kals was rejected by the Appellant in its TP study as not being functionally comparable to the profile of the Appellant. The TPO however rejected the contentions of the Appellant and added Kals to the final list of comparables. (Refer Pg. 26 to 27 of TPO Order).
Exclusion of Kals was challenged before the DRP (Refer Pg. 75 to 76 of DRP Objections), however the DRP rejected the contentions of the Appellant and directed Kals's inclusion in the final list of comparables. (Refer Pg. 15 of DRP Directions)
The appellant is challenging the exclusion of Kals as a comparable on the following points:-
37.1. Functionally Different- Kals earns its revenues from sale of software products. The same is evident from the Notes to clauses wherein it is clearly mentioned that the STPI unit is engaged in development of Software and Software Products and a training centre engaged in training of software professionals on online projects.(Refer Pg. 14, 17, 18 and 19)
37.2 Insufficient Segmental Data- The Annual Report does not provide segmental Details/bifurcation regarding the revenue/expenses earned/spent on Software development and products.
37.3 Additionally, it is pertinent to mention that the said comparable has been rejected as not being functionally comparable to the Appellant in the Appellant's own case for the preceding year i.e. AY 2008-09 by this Hon'ble Tribunal vide its order dated 23.08.2018. Hence there being no change in the profile of Kals between AY 2008-09 and 2009-10, the said comparable is liable to be rejected.(Refer Pg. 29 to 31 of Order).
Reliance is placed on the following decisions for the same Assessment Year wherein Infosys has been excluded as not being functionally comparable to a captive software developer.
i. Finserv India Pvt. Ltd. vITO, [2015] 60 taxmann.com 48 (Delhi-Trib) ii. OSI Systems Pvt. Ltd. v DCIT, [2016] 66 taxmann.com 109 (Hyderabad-Trib)
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Hence it is prayed that in view of the above arguments Kals cannot be taken as a comparable.
The ld. DR, on the other hand, relying on the orders of authorities below, submitted that this comparable was rightly included by the TPO in the final list of comparables, as it is functionally similar to the assessee.
Having considered the rival submissions on this comparable, we find substantial force in the contentions of the assessee. It is notable that that the said comparable has been rejected as not being functionally comparable to the Appellant in the Appellant's own case for the preceding year i.e. AY 2008-09 by ITAT Delhi Bench vide its order dated 23.08.2018. The findings of the Tribunal read as under :
3.2.7. The next comparable being agitated before us is Kals Systems Limited. In its TP study, the assessee has rejected the said comparable as not being functionally comparable. The TPO, however, introduced Kals as a comparable that it passes all filters. Before us, the Ld. Counsel of the assessee strongly opposed the inclusion of Kals and referring to the Annual Report of Kals submitted that this comparable dealt in software products as well as services. By relying on the screenshot of website of Kals, he argued that this company is engaged in providing varied array of activities including software products. He argued that even though the TPO had taken segmental details of Kals namely “Software Development & Training” segment for comparison with assessee, but, as per the financials, there is lack of segmental data/bifurcation vis-a-vis the income and expenses in relation to the products developed and sold by Kals. 3.2.28. The Ld. CIT Departmental Representative relied on the orders of the lower authorities and strongly argued for its inclusion. 3.2.29. We have heard the rival contentions of the parties and also perused the relevant material on record. We note that on similar set of facts, the coordinate Bench of the Tribunal in the case of Nokia Siemens Networks India Pvt. Ltd. vs. ACIT in ITA No. 333/Del/2013 has excluded this comparable by observing as follows: “81. At the outset it is brought to our notice that this company was considered by a coordinate bench of this tribunal in the immediately preceding year that is assessment year 2007-08 in assessee’s own case and this Tribunal rejected this company to be
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included as a comparable to the assessee. 82. On a perusal of the order dated 18.5.2016 in ITA No. 5837/Delhi/2011 in assessee’s own case, we find that this company was considered by this Tribunal vide paragraph numbers 37 to 39 and found that the software segment of this company also includes revenues from software and training, whereas the assessee company is not engaged in imparting any training or selling its software products to attract revenue. On this premise, this Tribunal held that the finances of this company are not comparable with the assessee company and on that ground this company is not a valid comparable. 83. Further, the Assessee has placed reliance on Aircom (supra), in order to exclude this comparable company on the ground that this company consisting of STP unit is engaged in software products and development of software and is also undertaking training activity of software professionals on online projects and not a good comparable. The coordinate bench has rejected this comparable by making following observations:- “18.3. After considering the rival submissions and perusing the relevant material on record, we find that the entire premise of the TPO’s inclusion of this company in the list of comparables is that the software products and training constitute only 4.24% of its revenue. This inference has been drawn on the basis of the information supplied by this company stating: “the use of readymade object laboratories is only to the tune of about (3.4 to 6.96) % in the year 200708 to 2008-09 . We fail to comprehend as to how the above line conveys that the software products’ revenue stands at 4.24%. What has been written is that the company’s use of the readymade object laboratories is only to the tune of maximum 4.24%. By no imagination this can be construed as revenues from software products. When we peruse the Annual report of this company, which is available in the paper book, it can be seen that there is no such mention of software products revenue limited to 4.24%. On the contrary, it has been mentioned in the Notes to the financial statement that: “the company is engaged in development of software and software products since its inception.” The company consisting of STPI unit is engaged in software products and development of software and is also undertaking training activity of software professionals on online projects. Not only the revenues of the segment considered by the TPO also include the revenue from software products, but also from training imparted on commercial basis. It is clear that the assessee is not providing any training under this segment, which has been rather included by the assessee in the second category of the assessee’s business, namely, ‘Software Deployment, Training, Consultancy and Equipment Rental.’ Since the assessee’s activity under this segment does not include any revenue from training, but the revenue of Kals Information Systems Ltd., for the purpose of comparison includes income from training, this company ceases to be comparable with the assessee’s segment of 'Software development services’. Similar view has been taken by the Tribunal in the assessee’s own case for the immediately preceding assessment years 2006-07 and 2007-08. Respectfully following the precedents, we hold that Kals Information Systems Ltd. (Seg.) should be expunged from the set of
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comparables.” 84. No change of circumstances is brought to our notice either by the assesse or the revenue, as such we do not find any reason to take a different view from the view taken by this Tribunal for the earlier year. We, therefore, consequently hold that this company is not a valid comparable to that of the assessee and has to be excluded from the final set of comparable companies for benchmarking international transaction related to software segment. ”
3.2.30. Respectfully following the view taken by the coordinate Bench, we direct the AO/TPO to exclude Kals from the list of comparables.”
Respectfully following the aforesaid finding of Co-ordinate Bench in the case of assessee for preceding assessment year, we direct the AO/TPO to exclude this comparable from the final list of comparables.
Regarding the next comparable, i.e., Sonata Software Ltd., the ld. Counsel for the assessee pleaded to exclude this company as under :
SONATA SOFTWARE LTD.{"Sonata"} 40. The said comparable was selected by the Appellant himself and was accepted by the TPO. (Refer Pg. 168 and 189 of TP Study and Pg. 8 of TPO Order). The said comparable was never objected to before the lower authorities and is being contested for the first time before this Hon'ble Tribunal.
The Appellant would like to place reliance on the Special Bench decision in the case of DCIT v Quark Systems [2010] 38 SOT 307 (CHD)(SB) which was confirmed by the Hon'ble Punjab and Haryana High Court vide reported as [2011] 244 CTR 542 wherein it has been held that there is no estoppel in law against the Assessee agitating its own comparables. This view now has been affirmed by the Hon'ble Bombay High Court in the case of CIT v Tata Power Solar Systems Ltd. [2017] 298 CTR 197 (Bombay). 42. Hence in view of the above decisions it is a settled principle of law that there is no estoppels barring the Appellant to contest its own comparables. 43. Having stated the above, Sonata deserves to be rejected in view of the following reasons:-
42.1 Functionally Different- Sonata is in the business of provision of both IT and ITES services as well as software products. (Refer Pg. 6 and Schedule 15 on Pg.24 of Annual Report)
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42.2 Fails TPO's RPT Filter of25%- Refer Pg. 27 of Annual Report
42.3 Holds Intellectual Property Right- Refer Pg. 8 of Annual Report 42.4 Significant spending on R&D 44. This Hon'ble Tribunal in the case of Cadence (Supra) held that Sonata's Annual Report showed inventory hence proving that the said company was into software products and whilst observing so remanded the matter to the file of the TPO to check the Assessee's contention regarding RPT. 45. In view of the above averments it is humbly submitted that Sonata cannot be taken as a suitable comparable to the Appellant. 16. On the other hand, the ld. DR submitted that the assessee has himself stated in the TP study report that it passes all the filters and functionally comparable and included it in the list of comparables. Therefore, it should not be excluded from the list of comparables.
After hearing both the sides and perusing the entire material available on record, we find that this comparable was selected both by assessee and the TPO. However, it is seen that the assessee had taken this company as good comparable and now he is challenging its inclusion which was accepted by the lower authorities. On going through the financial statements of this company under schedule 16 – Notes forming part of the accounts – under significant accounting policy at para-C, reads as under :
C -INVENTORIES: “Software products developed/under development are stated at cost. Software development cost incurred on products ready for marketing are amortized equally over a period of three year or earlier based on management evaluation of expected sales volumes and duration of the products life cycle.”
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D- SERVICES: Revenue from technical service contracts/software development are recognized on the basis of achievement of prescribed mile stones as relevant to each contract are proportionate completion method as applicable.
Further, we noted that under the director’s report at page No. 8 of annual report regarding research and development expenditure, the directors have reported as under :
D- Expenditure on R & D : R&D is carried on by the company as part of ongoing software development activity and the expenditure thereof is considered as part of operating expenditure. Hence, there is no amount that can be shown separately under the head of R & D expenses.
Further we noted from the financial statement under the trading and profit and loss account at schedule No.15 that in the impugned year, the said company had written off the finished products lying in his stock. We further observe that no any purchase sale of software products is found in the profit & loss account neither any research and development expenditure have been debited into the profit & loss account nor it has been created as an intangible asset in the balance sheet, i.e., no any R & D expenditure has been incurred by this company. In the impugned year no any revenue has been generated and no expenditure has been incurred for the software product.
17.1 In view of the above noted facts and submissions of both the parties, it is, however, not clear as to on what filters, the assessee chose this company as a good comparable. So it is necessary to examine the filters used by the assessee itself to the extent whether the filters of comparability test applied by assessee
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while including this comparable are significant or the reasons for exclusion of this company from the list of comparables assigned before us play an important role in the comparability test. Such reasons as given in the written submissions are (i) functional difference; (ii) failure to pass TPO’s RPT filter of 25%; (iii) holding intellectual Property Right and (iv) significant spending on R & D. We therefore, restore this issue to the file of AO/TPO to decide it afresh after examining the above facts. Needless to say, the assessee shall be given reasonable opportunity of being heard.
Adverting to SIM Card assembly segment, the ld. AR of the assessee has challenged capacity and working Capital adjustment, stating as under :
SIM CARD ASSEMBLY SEGMENT CAPACITY AND WORKING CAPITAL ADJUSTMENT 46. As stated above in the Sim Card segment the Appellant declared its OP/OC of (17.40%) whilst selecting 5 comparables with an average OP/OC of (1.75%). It was submitted before the TPO that the loss was owing to various circumstances such as initial years of operation, high competition in the market, under utilisation of capacities etc. 47. The TPO rejected the Appellant's contentions vis-a-vis the capacity and working capital adjustment whilst holding as under:- "The assessee claims that its AE G&D GMBH, sold the chips to the assessee at a price which was almost equal to the cost of those chips, thereby eliminating, the possibility of G&D GmBH reducing the prices of chip supplies to the assessee. The upshot of this argument only means that the AE did not subsidize the assessee inspite of the assessee being in the early stages of business. It is strange that the kind of sympathy the assessee expects from this office was not even offered by its AE. It has only proved the point made in the show cause notice that the assessee did not negotiate with its AE as an independent enterprise would. It has also mentioned that it is taking more risks in certain areas. In that case, it should be remunerated better by its AE. Its transaction with its AE are clearly not at arm's length. " 48. Aggrieved with the TPO's order the Appellant preferred to file objections before the Dispute Resolution Panel ("DRP"). 49. The DRP whilst dealing with the issue of capacity adjustment rejected the pleas of the Appellant whilst relying on its directions for the preceding year i.e. AY 2008-09 and held as under:-
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"9.1 With regard to the above issue the tax payer has argued that while comparing the margin with the comparables, the AOITPO have failed to account for any adjustments on account of the following reasons as a result of which there margin was lower that the comparables: a) Low sales realization due to falling prices b) Stiff market competition led to decrease in prices of chips c) Under utilization of capacities d) Regulatory Hurdles 9.2. This panel has gone through the taxpayer's submissions on the above issue and also perused the ITAT's order in the Appellant's own case for Assessment Year 2007- 08 and the DRP's order for Assessment Year 2008-09 where on similar grounds the taxpayer had sought adjustment but the same was not allowed. This Panel is of the view that during TNMM analysis the comparables also operate within the same economic conditions and market forces also playa similar role both for the taxpayer as well as for the comparable companies. The issue of competition in the market, the problems of meeting regulatory requirements etc. are akin to both the taxpayer and the comparables. Therefore this Panel is of the considered view that no adjustments on these impediments can be allowed for the purpose of comparability analysis because in TNMM analysis all these factor are automatically considered. Similarly, as regards to adjustments sought for under utilization of capacity, unless the robust and reliable data is made available both for the comparables as well as for the tested party, we are afraid the adjustment on mechanical basis cannot be made. Hence, grounds of objections relating to the above issues deserves to be jettisoned. "
The DRP did allow proportionate adjustment to the Appellant owing to which the adjustment in the Sim Card segment was reduced to INR 3,51,35,021/- as opposed to INR 6,98,19,061/-as proposed by the TPO.
It is humbly submitted that the above issue is no longer res-integra and this Hon'ble Tribunal is the Appellant's own case for AY 2008-09 which has been relied upon by the DRP as well, has principally held that capacity adjustment ought to have been allowed in favour of the Appellant. This Hon'ble Tribunal whilst allowing capacity adjustment to the Appellant held as under:- "3.6.6 On the issue of allowability of capacity adjustment, we are of the considered view that higher capacity utilization would lead to higher profitability as fixed costs would be spread over in a larger number of units manufactured. The difference in capacity utilization would materially effect the profit margin. Thus, if there is a difference in the level of capacity utilization of the assessee and the level of capacity utilization of the comparable, then adjustment would be required to be made to the profit margin of the comparable on account we are of the considered view that higher capacity utilization would lead to higher profitability as fixed costs would be spread over in a larger number of
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units manufactured. The difference in capacity utilization would materially affect the profit margin. Thus, if there is a difference in the level of capacity utilization of the assessee and the level of capacity utilization of the comparable, then adjustment would be required to be made to the profit margin of the comparable on account of difference in capacity utilization in terms of Rule 10B (1)(e)(iii) read with Rule 10B(2)/(3) of the Rules. Our view is fortified by the recent decision of Hon 'ble Bombay High Court in the case of CIT vs. Petro Araldite Pvt. Ltd. reported in [2018} 93 taxmann.com 438 (Bombay)l[2018) 256 Taxman 16 (Bombay). After considering plethora of case laws on the issue of allowability of capacity adjustment, the coordinate Bench of the Delhi Tribunal in HCL Technologies BPO Services Ltd. vs. ACIT reported in [2015} 172 TTJ I(Delhi - Trib.), observed as follows: 3.6.7 Respectfully following the judgment of the Hon 'ble Bombay High Court and the decision/s of the coordinate benches of Tribunal as aforementioned, we are of the considered opinion that the Assessee is entitled to the benefit of capacity adjustment whilst benchmarking the international transaction of SIM Card Assembly. 3.6.8 Another linked issue is regarding computation of capacity adjustment. In our opinion, the methodology adopted by TPOIDRP in computing 'capacity adjustment' whilst only considering the depreciation, is erroneous. Recently, the issue of computation of capacity adjustment has been considered by the coordinate Bench of the Delhi Tribunal in DCIT vs. Claas India (P) Ltd reported in [2015} 62 taxmann. com 173 (Delhi - Trib.) by observing as follows: 3.6.9 Respectfully following the decision of the coordinate bench of the Tribunal in DCIT vs. Claas India (P) Ltd. reported in [2015} 62 taxmann. com 173 (Delhi - Trib.), we are of the opinion that the issue of computation of capacity adjustment requires reconsideration and is thus, restored to file of AOITPO for re-computation in light of our observations in the preceding paragraph, after granting sufficient opportunity of hearing to the assessee. "
Hence this Hon'ble Tribunal has also acknowledged that the methodology of calculating the capacity adjustment was also debatable until recently as clarified by this Hon'ble Tribunal in the case of Claas India (Supra) and has allowed the said adjustment to the Appellant.
Vis-a-vis Working Capital adjustment, this Hon'ble Tribunal in the Appellant's own case for AY 2008-09 has allowed the same whilst holding as under:- "3.7.2 We have heard the rival submissions of the parties and perused the relevant material on record. We are of the opinion that once the TPOILd. DRP has principally allowed the claim of working capital adjustment with respect to Software Development Segment than there is no occasion to disallow similar claim for SIM Card Assembly Segment. Now there are various guidelines and factors that have been laid down to work out the working capital adjustment and accordingly, we direct the assessee to provide the detailed working of the working capital adjustment to the TPO and he is directed to verify the correctness of the amount and the working capital adjustment as given by the assessee and allow the same in
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accordance with settled principles. Thus, with this direction, this issue is treated as allowed for statistical purposes. 54. Hence this Hon'ble Tribunal on identical facts has allowed capacity adjustment and working capital adjustment in favour of the Appellant. Hence it is humbly prayed that the same may please be allowed in the relevant year as well.
On the other hand, the ld. DR relied on the orders of the authorities below and submitted that the lower authorities are justified in denying adjustment regarding capacity utilization and working capital.
We have heard the submissions of both the parties and have gone through the entire material on record and we find that the co-ordinate Bench of the Tribunal in assessee’s own case for preceding assessment year 2008-09, has decided this issue in the identical facts and circumstances. At the cost of repetition, the findings reached by Tribunal read as under : "3.7.2 We have heard the rival submissions of the parties and perused the relevant material on record. We are of the opinion that once the TPO/Ld. DRP has principally allowed the claim of working capital adjustment with respect to Software Development Segment than there is no occasion to disallow similar claim for SIM Card Assembly Segment. Now there are various guidelines and factors that have been laid down to work out the working capital adjustment and accordingly, we direct the assessee to provide the detailed working of the working capital adjustment to the TPO and he is directed to verify the correctness of the amount and the working capital adjustment as given by the assessee and allow the same in accordance with settled principles. Thus, with this direction, this issue is treated as allowed for statistical purposes.
Respectfully following the above findings, we also direct the AO/TPO to verify the correctness of the amount and the working capital adjustment as given by the assessee. The assessee is directed to furnish complete details pertaining to this adjustment before the AO/TPO. Accordingly, this issue is allowed for statistical purposes.
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Pleading for exclusion of Karnataka Hybrid Micro Devices Ltd., the ld. AR submitted as under :
“EXCLUSION OF KARNATAKA HYBRID MICRO DEVICES LTD. ("Karnataka Hybrid") 55. The Appellant also agitates exclusion of Karnataka Hybrid as a comparable in the SIM Card segment. During the course of hearing it was fairly pointed out that Karnataka Hybrid was Appellant's own comparable and was accepted by the TPO.
The Appellant would like to place reliance on the Special Bench decision in the case of DCIT v Quark Systems [2010] 38 SOT 307 (CHD)(SB) which was confirmed by the Hon'ble Punjab and Haryana High Court vide reported as [2011] 244 CTR 542 wherein it has been held that there is no estoppel in law against the Assessee agitating its own comparables. This view reiterated by Mumbai Bench of Tribunal in the case of Tata Power Solar Systems Ltd. v. Dy. CIT [2014] 62 SOT 93/41 taxmann.com 340, which has been now confirmed by the Hon'ble Bombay High Court in the case of CIT v Tata Power Solar Systems Ltd. [2017] 298 CTR 197 (Bombay).
Hence in view of the above decisions it is a settled principle of law that there is no estoppels barring the Appellant to contest its own comparables.
Having stated the above, Karnataka Hybrid deserves to be excluded as a comparable in view of the following points :-
58.1 Functionally Different- Karnataka Hybrid is into high end technology. The company's main focus is on high-margin aerospace and defence sectors especially ISRO, HAL, BEL and other defence establishments. Apart from this its core business segment is of thick film hybrid microelectronics and aerospace contract manufacturing. The company has also forayed into new areas such as assembly and testing of space craft sub systems, developing of fuel sensor hybrid tiles, development of the next generation voltage regulators, screening, testing and evaluation of aerospace components etc. (Refer page 2 of Annual Report)
58.2 Insufficient segmental - Karnataka Hybrid offers wide array of services as discussed in preceding paragraphs, however, there are insufficient segmental details qua there varied activities.
58.3 Extensive Spend on R&D- Karnataka Hybrid during the relevant period has done significant expenditure on Research and Development which make its FAR profile completely different from Appellant. Refer Pg. 4 and 19 of Annual Report
58.4 Rejected by the TPO as not being comparable to the Appellant in the preceding year i.e. AY 2008-09. (Refer Pg. 111 of preceding years TPO Order)
58.5 Kamataka Hybrid has no foreign exchange earnings during the relevant period which make its FAR profile completely different from Appellant.
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Hence as would be evident from the above, Karnataka Hybrid cannot be taken to be a comparable since it does not pass the FAR test in comparison to the Appellant.
On the other hand, the ld. DR submitted that the assessee has himself stated in the TP study report that it passes all the filters and functionally comparable and included it in the list of comparables. Therefore, it should not be excluded from the list of comparables. Therefore, the lower authorities are justified to include this comparable in the list of comparables.
After hearing both the sides and perusing the entire material available on record, we find that this comparable was selected by assessee which was accepted by the TPO. However, it is seen that the assessee had taken this company as good comparable and now he is challenging its inclusion. In view of above submissions of both the parties, it is, however, not clear as to on what filters, the assessee chose this company as a good comparable. So it is necessary to examine the filters used by the assessee itself to the extent whether the filters of comparability test applied by assessee while including this comparable are significant or the reasons for exclusion of this company from the list of comparables assigned before us play an important role in the comparability test. Such reasons as given in the written submissions are (i) functional difference; (ii) Insufficient segmental details(iii) No foreign exchange earning; and (iv) significant spending on R & D. We therefore, restore this issue to the file of AO/TPO to decide it afresh after examining the above facts coupled with the fact that the TPO itself had rejected this comparable in assessee’s own case for A.Y. 2008-09. Needless to say, the assessee shall be given reasonable opportunity of being heard.
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The assessee has also raised the issue regarding use of multiple year data, but no contentions are found raised by the assessee in its detailed written submissions, as reproduced in earlier part of this order. The assessee has also not produced before us any details pertaining to use of multiple year data. This ground is, therefore, dismissed.
Regarding disallowance u/s. 40(a)(ia), the ld. Counsel for the assessee submitted as under :
DISALLOWANCE UNDER SECTION 40(a)(ia) OF EXPORT COMMISSION 60. During the relevant assessment year the Appellant had made commission payments to the tune of INR 34,75,925 to its AE namely G&D Egypt Services LLC for forwarding sales orders in the region of Middle East and North Africa to the Appellant. 61. It was submitted before the AO that the payments were made only for forwarding of sales orders in territories which were controlled by G&D Egypt Services LLC and the said service was provided from outside India. Even otherwise it was submitted that the said service was neither Managerial, Technical or Consultancy and hence could not qualify as Fee for technical Service. 62. The AO however disregarded the submissions made by the Appellant and whilst holding the said services to be in the nature of 'fee for technical services' it was observed as under:- "4.3 1have gone through carefully the submission of the assessee and case laws referred by it. The contention raised by the assessee has thrown up following questions for determination: (i) Whether the commission of Rs.34,75,925/- paid to non-resident/outsiders is income deemed to accrue or arise in India within the meaning of section 9 of the IT Act, 1961. (ii) Whether the assessee was liable to deduct TDS on expenditure on export commission paid to non-resident/outsiders. Whether the commission ofRs.34.75,925/- paid to non-resident/outsiders is income deemed to accrue or arise in India within the meaning of section 9 of the IT Act, 1961. 4.5 In the case of the assessee company, all the conditions spe/t out in S. 9 (1)(vii) (b) are satisfied as under: i) The income is payable/paid by the resident.
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ii) Services are utilized by resident. iii) Business or profession is carried out in India.
4.6 As noted above, Section 9(1)(vii) would classify and cover all incomes as accruing and arising in India which partake the character of payment on account of 'Fee for technical services', which in turn, has been defined to include any payment for rendering of any managerial or consultancy services rendered by the non-resident agent. In the instant case, since the assesse has engaged the acumen and expertise of the outsiders/non-resident the consideration for which is termed as 'Commission '? This is to say that the payment by the resident assessee in connection with his business in India to a person outside India making use of his expertise in sale of goods in a particular country is nothing but a fee which has been paid by the resident assessee to the outsiders/non-resident for the services rendered by him and can be construed as "fees for technical services ".
4.7 Therefore in the light of above discussion it is presumed that there is an element of Consultancy Technical and Managerial services for which said commission was paid. In view of the above, it is established that the provisions of Section 9 of the Income Tax Act, 1961 would squarely come into place, as soon as any export commission is paid or becomes due.
4.14 In view of the above discussions the position, as per the provisions of the Act and in accordance with judicial pronouncements, is summarized as below:
(i). The commission paid to non-resident is income deemed to accrue or arise in India within the meaning of section 9 of the I T Act, 1961. (ii) The assessee is liable to deduct TDS on expenditure on export commission paid to non-resident.
4.15 In view of the above, it is held that assessee was liable to deduct TDS on export commission of Rs.34, 75,925/- paid to non-resident/outsiders since the assessee did not deduct the TDS as per provision of the section 195 of the IT Act, 1961 therefore total deduction of expenditure of Rs.34, 75,925/- on export commission as claimed by assessee, is hereby disallowed and added back to the taxable income of the assessee…..”
Aggrieved with the Draft Order, the Appellant preferred to file objections before the DRP. The DRP vide its directions dated 24.12.2013 confirmed the addition as proposed by the AO whilst holding as under:_ "13.4.4 Considering the facts of the case, it can be said that there is a strong business connection between G&D India and GD Egypt. The sale order received by G&D India is not possible without honoring the agreement with GD Egypt. GD Egypt is allegedly obtaining and forwarding the orders for G&D India from that region. GD Egypt, in terms of the agreement, carries out necessary tasks in that region by deputing its representatives etc. to the prospective customers. Thus, the principles laid down by various courts on the issue of 'business connection' when applies to the taxpayer's case do lead to a logical conclusion
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that there is a strong and vibrant business connection between the taxpayer and the GD Egypt It is also a fact that a transaction cannot be finalized until and unless GD Egypt is involved and therefore, the relationship between the two is such that the action cannot be completed without the payment of the said commission to GD Egypt. Under these facts, the Panel holds that there is a business connection between GD Egypt and G&D India. 13.4.5 The taxpayer has objected to the fact that the amounts remitted by the taxpayer to the GD Egypt is not FTS u/s 9(1)(vii) of the Act, as held by the AD. The amount paid by the taxpayer to the GD Egypt is FTS because FTS means any consideration for rendering of any managerial, technical or consultancy services. These terms have not been defined in the Act. However, the meaning of these terms has to be understood in the light of the purpose which these are going to service, particularly in the light of the present times when the law is being applied In view of the above, and considering the nature of services rendered by GD Egypt, it can be said that the services rendered are such which require expertise and knowledge in the specific area of work, such expertise cannot be developed overnight but is the result of long period of work in this line of activities coupled with accumulated experience of operations. The Panel therefore, believes that the payments made by the taxpayer to GD Egypt partakes the character of FTS under the domestic law. 13.4.6 Thus, it is established beyond doubt that the provisions of section 9(1)(vii) are applicable in the facts and circumstances of the case of the taxpayer. The claim of the taxpayer about rendering of certain services by GD Egypt outside India are not relevant in the light of Explanation below section 9(2) read with the explanatory notes. 13.4.7 Thus, it is established that the amounts remitted are chargeable to tax in India. The next step to ascertain is if the case of the taxpayer is covered under clause (b) of section 9(1)(vii) of the Act or not? According to the said section, FTS payable by a resident are deemed to accrue or arise in India where the royalty/fee is payable to a non-resident except where these are payable in respect of any right, property or information used or services utilized: • for the purposes of a business of profession carried on by such person outside India, or • for the purpose of making or earning any income from any source outside India. Both these eventualities are not cumulative but are in the alternative to each other and therefore on non satisfaction of anyone, the deeming fiction shall come into play in the case. The issue for consideration is the meaning of the expression 'such person' appearing in section 9(1)(vii)(b) of the Act. In view of the clear disposition of the relevant provisions of the Act and that the payments are being made by the resident taxpayer is not for any business carried out by it outside India but from India, the Panel holds that the taxpayer's claim on this account is not on sound footing and cannot be accepted. Thus, the Panel holds that the provisions of 9(1)(vii)(b) of the Act are also satisfied and the case of the taxpayer is not covered by either of the exceptions. 13.4.8 In the light of the above, the Panel holds that the amount paid by G&D India to GD Egypt is chargeable to tax under the Act. Accordingly, in the light of the discussion made
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about section 40(a)(i) in para 13.4.1 above, the Panel holds that the payments made by the taxpayer covers all the ingredients of section 40(a)(i) of the Act and therefore, the taxpayer was liable to deduct tax at source. "
In this regard it is respectfully submitted and is evident from the export commission agreement that the said commission was paid for forwarding of orders to the Appellant in territories which were under the control of G&D Egypt. There was no service apart from forwarding of orders which was provided to the Appellant. The same is evident from the extract of agreement reproduced herein below:- "WHEREAS GD India is, inter alia, an experienced manufacturer and provider of SIM Cards and accepts to provide these cards to GD Egypt or its customers, hereinafter called "cards ", according to the terms and conditions mentioned in this agreement. WHEREAS GD Egypt is responsible for the region of Middle East and North Africa as subsidiary of Giesecke & Devrient GmbH, Munich and is solely entitled to cover, marketing and Giesecke & Devrient GmbH's products sales in the said Region. " 2 Subject of the Agreement Both the parties have mutually agreed to work together according to the terms and conditions mentioned in this agreement. GD India produces and supplies the cards on the basis of binding individual orders issued by GD Egypt customers and forwarded through GD Egypt to GD India. Where as soon as the order is confirmed by G&D India it will be binding for both parties. It is further agreed and understood between the Parties that the said Product will be supplied to the customers directly by GD India and GD India will ensure timely and proper supply of the product as per the requirement specified by the customers in the individual orders. This agreement is governed and formalized the relations between GD Egypt & GD India in the following cases: A. GD India will produce and supply the cards on the basis of individual orders and as well the related invoices will be issued directly to GD Egypt customers from GD India in this case GD Egypt is entitled to the agreed upon commission for each and every individual order B. GD India will produce and supply the cards based on an internal PO for the production issued from GD Egypt. GD Egypt will issue related invoices to the customer who will pay directly to GD Egypt. Then the agreed market price is to be transferred to GD India by GD Egypt as per what was agreed upon with GDM " The Agreement constitutes neither an order by GD Egypt for PRODUCTS not the acceptance by G&D Indiafor any order placed by GD Egypt.
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Each party will act as an independent contractor and no agency, partnership, Joint Venture or other joint marketing relationship is created by this agreement or its performance. In particular no joint property and no joint assets will be created by this agreement or its performance. 3. Parties' rights & obligations 3.1 Supply of products: GD Egypt has been made to understand that the products are manufactured by G&D India and it will be supplied directly by G&D India to the end customer G&D India warrants that its products and services fully comply with the requested and agreed requirements mentioned in the related orders, and are free from defects. 3.2 Orders: GD Egypt will forward the orders to G&D India in written form. G&D India shall acknowledge each order by facsimile transmission within 2 working days of its receipt. The original of the order acknowledgement shall be forwarded to G&D without delay. Quantities, deliver dates, graduated prices and modes of payment are to be discussed, mentioned and determined with every individual order, as well as GD Egypt's due commission in case the related invoices will be raised/issued directly from G&D India to GD Egypt's customers against the supply of products and respective payment will be made to land received by G&D India at New Delhi/Gurgaon. 4.0 Commission: GD Egypt shall be entitled to the payment of commission for each & every order have been send to G&D India through its direct efforts and contracted during the term of the agreement, provided that invoicing will be directly from G&D India. "
From the clauses above it would be clear that the only service being provided by GD Egypt was the forwarding of orders in a territory in which G&D India did not have any presence. G&D Egypt as evident from the clauses above was responsible for the said territories and was charging commission for the orders secured with their help. The Hon'ble Apex Court in the case of GE India Technology Centre (P.) Ltd. v. CIT (327 ITR 456) has held that the obligation to deduct tax at source U/S 195 of the Act arises only when the payment is chargeable to tax under the provisions of the Act, in the hands of non-resident.
No other service let alone managerial/technical/consultancy service was ever procured from G&D Egypt. The AOIDRP have grossly erred in holding that the said service was in the nature of Fee for technical services when it is amply clear from the wordings of the agreement that the said payments were strictly commission in nature for the forwarding of orders and in the absence of a business connection/permanent establishment in India the said payments were not liable to tax in India and hence no disallowance U/S 40(a)(i) of the Act was warranted. It is respectfully submitted that apart from drawing vague inferences, the Assessing Officer has not brought on record any material fact to establish that GD Egypt had any business connection or permanent establishment in India.
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Reliance is placed on Circular No. 23 of 1969 issued by the Central Board of Direct Taxes ("CBDT") and subsequently reiterated by the CBDT in Circular No. 786 of 2000, wherein it is clarified that the commission paid by an Indian exporters to a foreign agent is not taxable in India. Thus, the present matter being covered by the said Circulars liability to deduct tax at source would per se be not applicable and no disallowance can be made under section 40(a)(i) of the Act. For the sake of completeness, it is respectfully submitted that CBDT has issued circular bearing no. 0712009 dated 22.10.2009, whereby CBDT has withdrawn circular No. 23 dated 23.7.1969 as well as circular No. 786 dated 07.02.2000, however, The said CBDT circular No. 7/2009 dated 22.10.2009 is applicable for the assessment year 2010-11 w.e.f. 22.10.2009 and not retrospectively and the instant assessment year is 2009-10. The legal position regarding applicability of said Circular/s were considered by the Hyderabad Bench of Tribunal in the case of Dy. CIT v. Divi's Laboratories Ltd. [20lI} 131 lTD 271 wherein it was held that commission paid to non-resident agent for services rendered outside India not being chargeable to tax in India could not be disallowed U/S 40(a)(ia) of the Act and Section 195 of the Act clearly speaks that unless the Income is liable to be taxed in India, there is no obligation to deduct tax at source and Section 9 of the Act does not provide scope for taxing such commission payment because the basic criteria provided in the section is about genesis or accruing or arising of income in India, by virtue of connection with the property in India, control and management vested in India, which are not satisfied and hence withdrawal of earlier circular issued by CBDT has not been of assistance to Revenue in disallowing such expenditure. The Hon'ble Delhi High Court in the case of CIT v Angelique International Ltd., [2013] 359 ITR 9 (Delhi) has categorically held that payments made to foreign agents prior to the applicability of Circular No.7 of 2009 could not be br ought to tax in India.
The issue of commission payments not being in the nature of FTS and hence not liable for any deduction of tax at source is also no longer res-integra. This Hon'ble Tribunal in the case of ACIT v Pahilajrai Jaikishin, [2016] 66 taxmann.com 30 (Mumbai- Trib) and ACIT v Evergreen International Ltd. [2018] 91 taxmann.com 111 (Delhi-Trib) wherein the Hon'ble Tribunal whilst considering the entire law along with the judgements of various co-ordinate benches, the jurisdictional High Court and the Supreme Court categorically held that sales commission for procuring export orders from outside India was neither managerial, technical or consultancy service, thus, not FTS in terms of section 9 of the Act. 69. This legal position has been consistently affirmed / followed / reiterated in the following judicial precedents :-
i. Director of Income-tax (International Taxation)-II vs Panalfa Autoelektrik Ltd. [2014] 272 CTR 117 (Delhi)
ii. ClT v. Eon Technology (P.) Ltd. [2012] 343 ITR 366/[2011] (Delhi) iii. DCIT v Elitecore Technologies Pvt. Ltd., [2017] 80 taxmann.com 6 (Ahmedabad- Trib) iv. DCIT v Welspun Corporation., [2017] 77 tamann.com 165 (Ahmedabad- Trib) v. Pankaj A Shah v ITO, [2014] 47 taxmann.com 205 (Ahmedabad-Trib)
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Based on our above detailed submission, it is submitted that keeping in view the facts and circumstances of the instant appeal, the appellant is entitled for deduction of export commission of INR 34,75,925 paid to G&D Egypt for sourcing of export orders in favour of the Appellant firm without deduction of tax at source U/S 195 of the Act, as these export commission payments to G&D Egypt in not a sum chargeable to tax in the hands of the G&D Egypt as contemplated U/S 195 of the Act and is neither a fee for technical/managerial services as defined in explanation 2 to Section 9(1)(vii)of the Act to bring it to tax under fiction created by the deeming provisions of Section 9 of the Act.
The ld. DR supported the orders of the authorities below.
Having considered the rival submissions, we find that this issue is squarely covered by the decision of Hon’ble Delhi High court in the case of CIT v. Angelique International Ltd., 359 ITR 9 (Del), wherein, it has been categorically held that payments made to foreign agents prior to the applicability of Circular No. 7 of 2009 could not be brought to tax in India. For ready reference, held portion of aforesaid decision is reproduced as under : Held : Under the circulars, payments made in form of a commission or discount to the foreign party was not chargeable to tax in India under Section 9(1)(vii) of the Income Tax Act, 1961. Circular Nos. 23 had been in force for a long time, from 1969. The Board may have withdrawn this circular and other circulars vide Circular No. 7 dated 22nd October, 2009 but the said withdrawal cannot be retrospective. Circular No. 7 of 2009 cannot be classified as explaining or clarifying the earlier circulars issued in 1969 and 2000. This assertion in the assessment order is far-fetched and does not merit acceptance. Circular No. 7 does not clarify the earlier circulars but withdraws them. This is obvious and apparent. Circulars in force in the relevant assessment year have to be taken into consideration and should not be ignored. So long as the circulars were in force, it aided in uniform and proper administration and application of the provisions of the Act. Read in this manner it was held that it cannot be said that the respondent-assessee was in default and had failed to deduct at source, though it was mandated and required. The respondent was entitled to rely upon the circulars. Once the income was not exigible or chargeable to tax, TDS was not required to be deducted. Money paid to the third parties, who did not have any office or permanent establishment in India, was exempt and not chargeable to tax. Thus on the said payments or income, TDS was not required to be deducted. Further the payments in question were made prior to circular No. 7/2009, no reason to interfere with the order passed by the tribunal deleting the addition made by the Assessing Officer under Section 40(a)(i). CIT versus Eli Lilly Company (India) Private Limited, (2009) 312 ITR 225 (SC) ; G.E India Technologies Centre Private Limited versus CIT, (2010) 327 ITR 456 (SC), CIT versus
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Toshoku Limited, (1980) 125 ITR 525 (SC), Catholic Syrian Bank Limited versus Commissioner of Income Tax, (2012) 3 SCC 784, followed. (Paras 4, 9, 10)
We, accordingly, decide this issue in favour of the assessee.
Charging of interest u/s. 234B and 234C is consequential in nature and the AO is directed to give its consequential effect. Ground pertaining to initiation of penalty is premature and is dismissed accordingly. No other issue is involved or raised in this appeal.
In the result, the appeal is partly allowed.
Order pronounced in the open court on 29.03.2019. Sd/- Sd/-
(Amit Shukla) (L.P. Sahu) Judicial member Accountant Member
Dated: 29th March, 2019 *aks* Copy of order forwarded to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order Assistant Registrar Income Tax Appellate Tribunal Delhi Benches, New Delhi