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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. BILLAIYA
O R D E R
PER N.K. BILLAIYA, AM:
This appeal by the assessee is directed against the assessment order dated 23.01.2014 made u/s. 143(3) r.w. Section 144C of the Act.
The assessee has raised 17 grounds of appeal which also includes additional grounds.
3. Ground No. 1 & 2 are of general in nature and need no separate adjudication.
4. Ground No. 3 is not pressed and accordingly it is dismissed as not pressed.
5. Ground No. 4, 5 & 6 relate to the Transfer Pricing Adjustment made by the TPO.
5.1. The TPO alleged that the assessee engaged in providing contract research and development service to its associated enterprises, though the claim of the assessee is that it is engaged in contract software development service. The entire dispute revolves around this issue relating to the nature of business as claimed by the assessee and as concluded by the TPO. With its nature of business, the assessee has selected 19 comparables in its TP study report whose arithmetic mean comes to 11.47%. The assessee has shown its operating margin for the contract R&D services at 15.11%. Since the OPM of the assessee was higher than the arithmetic mean of the comparables, no transfer pricing adjustment was required.
5.2. Following comparables were selected by the assessee as per its study report.
Sr. Name of the Company Wt. Avg.(OP/OC) No. 1 Akshay Software Technologies Limited, 6.79% 2. Ancent Software International Limited 7.41% 3. Aztecsoft Limited 12.13% 4. CG-VAK Software & Exports Limited - 1.41% 5. Goldstone Technologies Limited 24.01% 6. Indium Software (India) Limited 1.25%
KPIT Cummins Infosystems Ltimited 12.36% 8. Larsen & Toubro Infotech Limited 16.46% 9. LGS Global Limited (Lanco Global Systems 24.60% Limited) 10. Maars Software International Limited 7.14% 11. Mindtree Limited 12.01% 12. Persistent Systems Private Limited 24.10% 13. Quinlegra Solutions Limited 18.95% 14. RS Software (India) Limited 9.80% 15. Sasken Communication Technologies Limited 19.55% (Segmental) 16. SIP Technologies and Exports Limtied -10.07% 17 Softsol India Limited 14.95% 18. V M Softech Limited 2.08% 19. Zylog Systems Limited 16.63% Arithmetic mean 11.47% 5.3. The operating margin was computed as under:
FY 2008-09 Particulars Amt. (in Rs.) INCOME Income from Services rendered 16,03,85,489 Prior period income 37,14,056 Total Operating Income 16,40,99,545
EXPENDITURE Administrative, sales promotion and other 3,57,17,522 expenses Personal expenses 9,25,75,200 Foreign Exchange loss 56,62,994 Depreciation 36,93,991 Fringe Benefit tax 16,00,000 Prior period expenses 32,29,614 Less: Non operating expense (1,36,988) Total Operating Expenses 14,25,58,269
Operating Profit 2,15,41,376
OP/OC(%) 15.11 5.4. During the course of the proceedings before the TPO, the assessee was asked to explain why the comparable companies selected by it should not be rejected and why the comparable companies selected by the TPO should not be adopted to benchmark the international transactions. The bone of contention was what was mentioned in Form No. 3CEB and after the perusal of the Research & Development Services Agreement, it appears that the international transactions are in the nature of R&D services provided to the AE But on the perusal of the Transfer Pricing Study Report (TPSR), the same transaction is treated as provision of contract software development services. Thus, there is a contradiction between Form No. 3CEB and the TPSR.
5.5. The assessee was asked to justify its claim of business/services. The assessee was also asked to justify the arrival of markup of 15% on the services provided by it. The assessee filed a detailed reply vide submission dated 17.1.2013. It was strongly contended that mere nomenclature cannot be a basis for determining substance of transaction. It was explained that the mere usage of the terminology “research and development” in the inter-company agreement entered into by the assessee does not imply that the services are not in the nature of software development. It was further explained that the TP Study undertaken by the assessee clearly explains the nature of activities and hence should be accepted unless something contrary is put on record. It was also brought to the notice of the TPO that the assessee is a contract service provider and does not perform end to end product development in India. It only undertakes certain portions of a typical software development lifecycle and is not exposed to any business risks. Hence, it is compensated on a cost plus basis. Therefore, it was pointed out that profit split method is not applicable in the instant case.
5.6. The assessee’s submission was considered by the TPO but was not accepted for the simple reason that in Form No. 3CEB as well as in the agreement, the assessee has stated its services as Research & Development Services. Further drawing support from the Annual Financials of the assessee, the TPO was convinced that the assessee is rendering R&D services to the AE and as per the agreement, the assessee is an economic owner of such IP development.
5.7. The comparable selected by the assessee were outrightly rejected by the TPO who proceeded by taking his own comparables.
Sl. No. Name of the Comparable OP/TC 1. Acropetal Technologies Ltd. 71.92% 2. Coral Hubs Ltd. 38.69% 3. Eclerx Services Ltd. 50.43% Arithmetic Mean 53.68% 5.8. Based on the above comparable companies, the TPO concluded by making adjustments as under:
Operating cost for services Rs. 14,25,58,269/- Operating profit @ 53.68% Rs. 7,65,25,279 Arms Length price @ 53.68% Rs. 21,90,83,548/- Variation Rs. 5,49,84,003/-
5% of International Rs. 82,04,977/- transaction Adjustment Rs. 5,49,84,003/-
The assessee carried the matter before the DRP. Before the DRP a complete log book of the activities done by the assessee was provided. Once again it was strongly contended that the TPO has not appreciated the business of the assessee properly and he was misguided by rejecting assessee’s comparables and adopting his own comparables which are not applicable on the facts of the case. The DRP found it appropriate to call for a remand report from the TPO. The TPO submitted his remand report dated 8.10.2013. However, in his remand report, the TPO was once again carried away with his strong belief that the transactions of the assessee need to be benchmarked as KPO. Once again, the TPO proceeded by the belief that assessee’s business activities are of performing Research & Development services, to further develop and improve the teleconferencing products which are akin to Research and Development activities which is also a sub- domain of Knowledge Process Outsourcing (KPO) activity. The DRP after receiving the remand report confirmed the order of the TPO.
7. Aggrieved by which the assessee is before us.
The Ld. Counsel for the assessee reiterated what has been stated during the course of the Transfer Pricing proceedings and also before the DRP. The Ld. Counsel straightaway drew our attention to the copies of Softex form filed by the assessee with the STPI authorities. It is the say of the Ld. Counsel that this evidence clearly show that the services are merely in the nature of Software Development Services. In support of his contention, the Ld. Counsel filed a complete set of documents to substantiate his claim of Software Development Services provider.
Per contra, the Ld. Departmental Representative strongly stated that the claim of the service provided by the assessee is actually embedded in the software itself. The Ld. DR strongly relied upon the decision of the Tribunal Delhi Bench in the case of ST Microelectronics (P) Ltd Vs CIT 145 TTJ 553. It is the say of the Ld. DR that where product produced by the assessee in itself is of a complex nature which required skill work force. The assessee was rightly turned a high end performer in field of Computor Software and therefore there is no error in the comparables selected by the TPO.
We have given a thoughtful consideration to the rival submissions and have carefully perused the orders of the authorities below. We have also considered the relevant documentary evidences brought on record. In our considered opinion, the entire dispute revolves around the nature of business of the assessee. The assessee claims itself to be a Software Development Service Provider whereas the TPO has treated the assessee as engaged in providing contract Research & Development Services. This dispute gets strength from the nomenclature used by the assessee in Form No. 3CEB and also in its Transfer Pricing Study Report. However, the documentary evidences filed in the form of copies of Softex Forms and the order of the STPI authorities paint an altogether different picture. In our considered opinion, these documents have not been properly appreciated by the Revenue authorities. Had these documents been examined qua the nature of business of the assessee, the resultant product would have been different. Therefore, in the interest of justice and fair play, we restore this issue to the file of the TPO. The TPO is directed to re-examine the entire issue by denovo assessment. The TPO is directed to decide the issue on the basis of Softex Form filed with the STPI authorities and related orders of the STPI authorities. The assessee is directed to furnish necessary details and the TPO is directed to examine the same after giving reasonable opportunity of being heard to the assessee. Needless to mention, the TPO shall also decide all other related issues with the TP adjustments relating to working capital adjustments and differences in the risks. Ground No. 4,5 & 6 are treated as allowed for statistical purpose.
Ground No. 7,8 & 9 are taken together relate to the Transfer Pricing Adjustments. Since we have restored the determination or otherwise of TP adjustment qua ground No. 4,5 & 6 hereinabove, the assessee is free to raise any related issue before the TPO and the TPO is directed to consider the same after giving reasonable and fair opportunity to the assessee. Ground No. 7,8 & 9 are treated together are treated as allowed for statistical purpose.
Ground No. 10 & 11 relate to the grievance that the directions of the DRP have not been followed while framing the assessment order.
12.1. Since the Revenue is not in appeal against the directions of the DRP, the same become final on Revenue and the TPO/AO are bound to follow those directions. We also find that a rectification application is filed by the assessee on 11.12.2013. We direct the TPO/AO to follow the directions of the DRP and decide the rectification application expeditiously. Ground No. 10 & 11 are accordingly allowed.
Ground No. 12 is consequential to ground No. 4,5 & 6 hereinabove, we decide accordingly.
Ground No. 13 relates to certain arithmetical error in the computation of net income-tax.
14.1. We find that a rectification application is pending with the AO. The AO is directed to decide the rectification application dated 14.2.2014 expeditiously.
Ground No. 14 relates to an amount of Rs. 38,44,080/- which according to the AO is already refunded to the assessee while computing the income tax liability.
15.1. Once again we find that a rectification application have been filed by the assessee dated 14.2.2014. The AO is directed to decide the same expeditiously.
Ground No. 15,16 & 17 relate to the levy of interest u/s. 234B, 234C & 234D. Levy of interest is mandatory though consequential in nature. We, accordingly direct the AO to charge interest as per provisions of the law. Interest u/s. 234C of the Act is charged on the returned income and not on the assessed income.
In the result, the appeal filed by the assessee is allowed in part for statistical purpose. Order pronounced in the open court on 10th November, 2015.