Income Tax Appellate Tribunal - Delhi
Siemens Product Lifecycle Management ... vs Acit, New Delhi on 22 January, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I-1' : NEW DELHI)
BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.5922/Del./2012
(ASSESSMENT YEAR : 2008-09)
Siemens Product Lifecycle Management vs. ACIT, Circle 8 (1),
Software (India) Pvt. Ltd., New Delhi.
E - 20, 1st & 2nd Floor, Hauz Khas,
New Delhi.
(PAN : AABCS7638E)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Ravi Sharma, Advocate
Shri Anubhav Rastogi, Advocate
REVENUE BY : Shri Sanjay I. Bara, CIT DR
Date of Hearing : 22.11.2017
Date of Order : 22.01.2018
ORDER
PER KULDIP SINGH :
The Appellant, M/s. Siemens Product Lifecycle Management Software (India) Private Limited (hereinafter referred to as 'the taxpayer') by filing the present appeal sought to set aside the impugned order dated 28.09.2012, passed by the Assessing Officer in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax 2 ITA No.5922/Del/2012 Act, 1961 (for short 'the Act') qua the assessment years 2008-09 on the grounds inter alia that :-
"1. On the facts and in law, the Learned Assistant Commissioner of Income Tax, Circle 8(1), New Delhi ("Ld. AO") erred in passing the impugned assessment order dated 28 September 2012 pursuant to the directions of the Hon'ble Dispute Resolution Panel ("Hon'ble DRP") and computing the total income of the Appellant for Assessment Year ('"AY") 2008-09 at INR 27,30,95,863 as against the returned income of INR 12,07,44,372.
2. The Ld. AO erred in proposing and the Hon'ble DRP further erred in confirming the addition of Rs.15,23,51,491 to the Appellant's returned income of Rs.12,07,44,372. Transfer Pricing Adjustment - INR 10,91,38,523
3. On the facts and in law, the Learned Additional Director of Income Tax, Transfer Pricing Officer- II(4) ("'Ld. TPO") and the Ld. AO erred in proposing and the Hon'ble DRP erred in confirming the addition of Rs.10,91,38,523 in relation to the international transactions of provision of software development, competency center and IT support services.
4. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant under section 92D of the Income-tax Act, 1961 ("the Act") read with Rule 10D of the Income-tax Rule, 1962 ("the Rules") and calling for a fresh search, applying arbitrary filters during the assessment proceedings, without discharging the statutory onus to establish that any of the conditions specified in clause (a) to (d) of Section 92C(3) of the Act has not been satisfied.
5. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in disregarding the use of current year and prior two years' data by the Appellant to benchmark the international transactions in the TP documentation for the relevant previous year in contravention of Rule 10B(4) of the Rules.
3 ITA No.5922/Del/2012
6. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP violated the provisions of Rule 10B(2) of the Rules by arbitrarily rejecting the companies selected by the Appellant in the TP documentation and the fresh search, which are functionally comparable to the Appellant.
7. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP violated the provisions of Rule 10B(2) of the Rules by arbitrarily introducing new companies as comparable to the Appellant, disregarding the differences in the functional profile of the Appellant and such additional companies.
8. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in disregarding the segmentation carried out by the Appellant in its TP documentation and subsequently, merging the three segments namely, software development, competency centre and IT support services without appreciating the cardinal principal of Transfer Pricing which requires that each transaction should be benchmarked separately based on the provisions of section 92(1) of the Act.
9. On the facts and in law, the Ld. TPO and the Ld. AO erred in computing and the Hon'ble DRP erred in disregarding the correct operating profit margin of the companies selected by the Ld. TPO.
10. 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(I)(e)(iii) and 10B(3) of the Rules to account for, inter- alia (a) difference in working capital employed, and (b) difference in risk assumed, between the Appellant and the comparable companies selected by the Ld. TPO. Adjustment on account of Advance Billing- INR 4,32,12,968
11. On the facts and in law, the Ld. AO erred in making and the Hon'ble DRP erred in confirming an ad-hoc addition of Rs.4,32,12,968 on account of income from maintenance, enhancement and support services (Advance Billing / Deferred Revenue) without appreciating that no income has accrued to the Appellant for the year under consideration and that on similar facts the Hon'ble Tribunal deleted such additions in earlier years. 4 ITA No.5922/Del/2012
12. Without prejudice to above and in alternate, Ld. AO and the Hon'ble DRP has erred on facts and in law in disregarding the regular and the consistent method of accounting being followed by the Appellant in recognizing the revenue from maintenance, enhancement and support services provided by the Appellant to its customers.
13. On the facts and in law, the Ld. AO erred in initiating penalty proceedings u/s 271( 1)(c) of the Act.
14. On the facts and in law, the Ld. AO has erred holding that interest under Section 234B and Section 234C be charged on the assessed income of the Appellant.
15. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in withdrawing interest u/s 244A of the Act."
2. Briefly stated the facts necessary for adjudication of the controversy at hand are : the taxpayer is a subsidiary of Siemens US (formerly UGS Corp., USA). The taxpayer is engaged in providing Product Lifecycle Management software solutions and maintenance, enhancement and support services for the same. The taxpayer also provides software related research and development services to its holding company though a unit registered under the Software Technology Park (STP) scheme of the Government of India and technical support to its follow subsidiary companies.
3. During the year under assessment, the taxpayer entered into international transaction as under :-
5 ITA No.5922/Del/2012
Nature of International Transaction Method Amount (in Selected INR) Payment for purchase depiction and replication of software Payment of license fee for use of software 391,913,055 Provision of software development services 963,111,115 to AEs Provision of competency centre services to TNMM 11,564,838 AEs Provision of IT support services to AEs 77,430,923 Cost allocation of infrastructure utilization 40,907,307 charges by AEs
4. The taxpayer in its TP study averred that with regard to provision of software development, competency centre and IT Support Services (ITSS), the taxpayer works as a contract service provider for group company. The taxpayer in its TP documentation used Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) In order to benchmark its international transactions by taking multiple years data and chosen 23 comparables for software development and competency centre segment and 7 comparables for ITSS with mean Operating Profit/ Total Cost (OP/TC) margin of 14.84% and 12.14% respectively as against taxpayer's OP/TC margin for software development, competency centre and ITSS at 11.36%, 10.01% and 7.18% respectively. However, on the basis of fresh search result, as per queries raised by ld. TPO, the taxpayer taken 15 comparables for software development and competency centre segment and 5 comparables for ITSS with mean OP/TC margin of 9.68% and 6 ITA No.5922/Del/2012 7.68% respectively as against taxpayer's OP/TC margin of 11.36%, 10.01% and 7.18% of software development, competency centre and ITSS.
5. TPO in its economic analysis rejected the segmentation carried out by the taxpayer. TPO also rejected the segregation approach adopted by the taxpayer for benchmarking the international transaction in respect of its three segments viz. of software development, competency centre and ITSS and have clubbed all the three segments. However, the taxpayer has not challenged the aggregation.
6. The TPO, after taking into consideration the TP study made by the taxpayer in its economic analysis, finally selected 14 comparables having average OP/TC at 27.43% as against taxpayer's OP/TC margin of 10.96% and thereby proposed the TP adjustment of Rs.16,20,62,898/-.
7. The taxpayer carried the matter before the ld. DRP by filing objections who has partly accepted the contentions raised by the taxpayer. Post DRP directions, mean OP/TC margin of comparables come down to 19.67% (18% after treating forex mean/loss as operating) and accordingly, AO recomputed the ALP adjustment at Rs.10,91,38,523/-. Feeling aggrieved, the taxpayer 7 ITA No.5922/Del/2012 has come up before the Tribunal by way of filing the present appeal.
8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUNDS NO.1, 2, 3 &4
9. Grounds No.1, 2, 3 & 4 need no findings being general in nature and having been covered by the subsequent grounds. GROUNDS NO.5, 6 & 7
10. TNMM method used by the taxpayer as the MAM and Profit Level Indicator (PLI) has not been disputed by the TPO. However, the TPO rejected the segregated approach adopted by the taxpayer rather clubbed all the segments in question for benchmarking the international transactions, which has also not been challenged by the taxpayer.
11. TPO, after applying various filters, making analysis of TP study of the taxpayer and on the basis of its own economic analysis, finally selected 14 comparables having average OP/TC of 27.43% as against 10.01% of the taxpayer determined the ALP of Rs.16,20,62,898/-. However, post DRP directions, 15 comparables 8 ITA No.5922/Del/2012 have been taken by the AO to calculate the operating margin (OP/TC) by treating this forex gain/loss as non operating in nature which are as under :-
Sl. Company name OP/TC
No. (treating forex
gain/loss as non
operating)
1. 3 K Technologies Ltd. 35.36%
2. Akshay Software Technologies Ltd. 9.25%
3. Bodhtree Consulting Limited 20.86%
4. Flextronics Software Systems Ltd 7.56%
(Aricent Technologies (holding Ltd.)
5. Infosys Technologies Limited 40.41%
6. Kals Information Systems Lid. (seg) 30.92%
7. Larsen & Toubro Infotech Ltd. 17.74%
8. Lucid Software Limited 16.50%
9. Mindtree Limited (segmental) 17.51%
10. Persistent Systems Ltd. 27.70%
11. Quintegra Solution Ltd. 21.74%
12. RS Software Limited 7.79%
13. Sagarsoft (India) Ltd. 16.92%
14. V M F Soft Tech Ltd. 4.32%
15. Zylog Systems Limited 20.51%
Mean 19.67333333
12. On the basis of average OP/TC mean margin of the comparables at 19.67% by treating forex gain/loss as non operating in nature, the AO calculated the ALP adjustment as under :-
Particulars Amount in
INR
Price charged in international transaction (excluding 98,40,43,263
voluntary adjustment of INR 39,796,556)
Operating Cost of the taxpayer for provision of services94,67,52,187 Add : mark-up of 19.67% 18,62,26,155 ALP for provision of services 1,13,29,78,342 105% of Price charged in international transaction 1,03,32,45,426 Difference between ALP and Price charged in 14,89,35,079 international transaction for which the adjustment is required to be made Adjustment already offered by the taxpayer 3,97,96,556 Adjustment required to be made by the AO 10,91,38,523 9 ITA No.5922/Del/2012
13. In the backdrop of the aforesaid facts and circumstances of this case, the ld. AR to cut short the controversy sought exclusion of six comparables viz. Infosys Technologies Ltd., 3K Technologies Ltd., KALS Information Systems (Seg.), Persistent Systems Ltd., Bodhtree Consulting Ltd. and Zylog Systems Ltd..
14. Before examining the comparability of the aforesaid companies vis-à-vis the taxpayer, we would like to have an overview of the nature of the work done by the taxpayer for its AE which is otherwise not in dispute, for ready perusal.
15. During the year under assessment, the taxpayer provided software development services, competency centre services and IT Support Services to its AE qua which ALP adjustment of Rs.10,91,38,523/- have been made.
16. Now, we would like to examine the comparability of the aforesaid companies vis-à-vis the taxpayer one by one. INFOSYS TECHNOLOGIES LTD. (INFOSYS)
17. The taxpayer sought to exclude Infosys from the final set of comparables on the grounds inter alia that Infosys is functionally dis-similar; it has huge sales/turnover of Rs.15648 crores having substantial intangible assets incurring huge amount on R&D for 10 ITA No.5922/Del/2012 developing new area of functions; it owns products/leverages on its premium banking solution 'Finacle'; and relied upon the cases of CIT vs. M/s. Agnity India Technologies Private Ltd. - (2013) 36 taxmann.com 289 (Delhi), Systech Integrators India (P.) Ltd. vs. ITO - 44 taxmann.com 324 (Banglaore-Trib.), FCG Software Services (India) P. Ltd. vs. ITO - 51 taxmann.com 75 (Bangalore
- Trib.) and CIT II vs. Intoto Software India Pvt. Ltd. in ITA No.233 of 2014 (Hon'ble High Court of Andhra Pradesh).
18. Undisputedly, the taxpayer is a captive service provider and providing services as desired by its AE. However, on the other hand, page 130 of the Annual Report, available in the paper book, shows that Infosys is into providing diversified services viz. providing end to end business solutions that leverage technology thereby enabling clients to enhance business performance. The solutions span the entire software life cycle encompassing technical consulting, design, development, reengineering, maintenance, systems integration, package evaluation and implementation, and testing and infrastructure management services. In addition, the company offers software products for the banking industry.
19. Moreover, turnover of Infosys is of Rs.15648 crores for AY 2007-08 as against taxpayer's turnover of Rs.109 crores which is 11 ITA No.5922/Del/2012 143 times of the turnover of the taxpayer. Infosys is also having huge intangible of Rs.130684 crores as per the detailed report filed at page 128 of the annual report. Infosys is also expending huge amount on R&D for developing and creating new functionalities which is to the tune of 1.3% of the total revenue. Furthermore, it is also not in dispute that Infosys owns product "Finacle" which is a universal banking solution empowering 109 banks across 60 countries helping them serve over 20000 branches (referred at page 80 of the annual report compendium). Perusal of the P&L account, available at page 124 of the annual report also shows that Infosys has income of RS.15648 crores from software services and product of which segmental information is not available.
20. Infosys has been ordered to be excluded by the Hon'ble Delhi High Court in case cited as CIT vs. Agnity India Technologies (P.) Ltd. (supra) while examining its comparability with Agnity India Technologies which was a captive service provider operating on minimal risk providing software development services which has affirmed the decision rendered by the coordinate Bench of the Tribunal for excluding Infosys from the list of comparables for the reason that Infosys is a giant company in the area of development of software, assumption of risk leading to higher profits etc. Keeping in view the aforesaid 12 ITA No.5922/Del/2012 discussion, we are of the considered view that Infosys being a giant company operating on full-fledged risk leading to maximum profit having huge revenue and expending 1.3% of its turnover on R&D having huge intangibles is not a suitable comparable vis-à-vis taxpayer which is a captive service provider operating on a minimum risk and only having turnover of RS.109 crores as against turnover of Infosys of Rs.15648 crores. So, we order to exclude Infosys from the final set of comparables. 3K TECHNOLOGIES LTD. (3K)
21. The taxpayer sought exclusion of 3K for benchmarking the international transactions on grounds of functional dissimilarities, unreliable financial information, fails employee cost filter applied by the TPO and relied upon the case of Ness Technologies India Pvt. Ltd. vs. ACIT - (2014) 52 taxmann.com 406 (Mumbai-Trib).
22. Para 3.2.1 at page 14 of the TP order apparently shows that the ld. TPO has himself applied the employee cost filter at 25% of the total cost, however when we examine annual report of 3K, available at page 14 of the AR compendium, personnel cost is of Rs.115,63,474/- which is 3.70%.
23. When we examine the functional comparability of 3K vis-à- vis the taxpayer from page 4 of the annual report compendium, it 13 ITA No.5922/Del/2012 has come on record that 3K is into business of design, develop, manufacture, assemble computers, components parts and accessories thereof and also obtain technical know-how by entering into foreign collaboration for the development of computer systems in India and abroad and other related activities. The present authorized share capital of the company is Rs.1,00,00,000/- and the issue subscribed and paid up share capital of the company stands at Rs.10,00,000/-. During the year, the company has made a turnover of Rs.40,20,39,534/- and earned a profit before tax of Rs.8,91,02,055/-. It is also clear from annual report of 3K that its focus and investment in its R&D activities in software engineering technologies and products and 3K leverages its excellence in technology for producing world class products and solutions whereas the taxpayer is a captive software development provider having no R&D activities and not being into producing product and solutions.
24. Furthermore, financial information available in the public domain is not reliable as is evident from Schedule 12 of the Notes forming part of the accounts available at page 19 of the paper book.
25. Comparability of 3K has also been examined by the coordinate Bench of the Tribunal in Ness Technologies India Pvt. Ltd. (supra) for AY 2008-09 engaged in software development and 14 ITA No.5922/Del/2012 ITES and has been ordered to be excluded from the list of comparables for benchmarking the international transactions on ground of failing the employee cost to sale filter of 25% applied by the TPO as 3K employee cost of the company was found to be 5.56% of the total turnover only.
26. In view of what has been discussed above, we are of the considered view that keeping in view the functional dissimilarity, unreliable financials of the company and failing employee cost filter applied by the TPO, 3K is not a suitable comparable for benchmarking the international transactions, hence ordered to be excluded.
KALS INFORMATION SYSTEMS (SEG.) (KALS)
27. The taxpayer sought exclusion of KALS on ground of functional dis-similarity being into the business of software services and software products. Undisputedly, the taxpayer is into the business of software development services. Perusal of the annual report of KALS, available at pages 219 to 242 of the annual report compendium, particularly schedule 16 of the Notes to the Financial statements apparently proved that KALS is engaged in development of software and software products since its inception. The company consisting of STPI Unit engaged in software and 15 ITA No.5922/Del/2012 software products and training centre engaged in training of software professionals on online projects. Revenue recognition of KALS is that it drives its revenues primarily from software services and software products, however, segmental data bifurcating the revenue from product and software development is not available. In the given circumstances, we are of the considered view that KALS cannot be considered as a suitable comparable vis- à-vis the taxpayer which is a routine software developer, hence ordered to be excluded.
PERSISTENT SYSTEMS LTD. (PERSISTENT)
28. The taxpayer sought exclusion of Persistent on grounds inter alia that it is functionally different being a product company; it has undergone extra ordinary events during the year under assessment; having high research and development expenses.
29. Ld. DR relied upon TPO/DRP in order to oppose the arguments addressed by ld. AR.
30. Perusal of the annual report of Persistent, available at pages 243 to 282 of annual report compendium, shows that it is mentioned in the vision of the company from the Chairman's desk as under :-
16 ITA No.5922/Del/2012
"Focus has been an important attribute for Persistent Systems. We started in the early '90s by working with product companies with an offshore centric model focused on technology excellence. As our unique differentiator, we have continued to develop and refine our expertise in this area and have built leadership in Outsourced Software Product Development (OPD)."
31. Furthermore, it is mentioned in one of the strength of Persistent at page 251 of the annual report that Persistent Outsourced Software Product Development (OPD) specialist with deep rooted product development culture.
32. Ld. AR for the taxpayer also contended that Persistent has undergone extra ordinary events in 2007-08 as it has acquired people and assets of Matrimony Pvt. Ltd. and starts operation in Hyderabad and further contended that the taxpayer has incurred 1% of the total turnover on the research and development expenditure. However, the taxpayer has failed to prove the impact of extra ordinary events on the profitability of the company.
33. Keeping in view the profile of Persistent discussed in preceding paras vis-à-vis the taxpayer which is a routine software developer goes to prove that the taxpayer is functionally dis-similar being engaged into software product design and analytic analysis of which segmental results are not available. Persistent has been ordered to be excluded by the coordinate Bench of the Tribunal as a comparable vis-à-vis software developer company, namely, 3DPLM Software Solutions Ltd. vs. DCIT, Circle 11 (1), 17 ITA No.5922/Del/2012 Bangalore - (2014) 42 taxmann.com 333 (Banglaore - Trib.). In view of the matter, we are of the considered view that the Persistent is not a suitable comparable for benchmarking the international transaction, hence ordered to be excluded. BODHTREE CONSULTING LTD. (BODHTREE)
34. The taxpayer sought exclusion of Bodhtree on grounds inter alia that it is functionally dis-similar having volatile margin which has been ordered to be excluded by the coordinate Bench of the Tribunal in Intoto Software India (P.) Ltd. vs. ITO - (2016) 65 taxmann.com 119 (Hyderabad - Trib.) from the list of comparables to benchmarking the international transaction vis-à- vis software developer.
35. Ld. DR relied upon TPO/DRP in order to oppose the arguments addressed by ld. AR.
36. Profile of the Bodhtree is described at page 33 of the annual report compendium 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, software consultancy, design and development of solutions using the latest technologies.
It has a large pool of skilled resources on advanced technology platform including J2EE, Microsoft, NET and Linux platforms. Bodhtree is ISO certified and has a presence in USA and South East Asian countries."18 ITA No.5922/Del/2012
37. Bodhtree was founded as a product engineering company and continues to deliver world-class product engineering services ranging from application development and maintenance, web development and outsourced product development to QA and managed testing services. Applying agile and scrum-based methodologies, we engaged customers in a highly interactive process to develop superior software products on timelines that beat the competition to market - at reduced operational costs and risk.
38. Furthermore, the taxpayer proved on file highly volatile margin of Bodhtree which is reproduced for ready perusal form the synopsis given by the taxpayer as under :-
Financial Year Margin %age
2004-05 25.24%
2005-06 14.66%
2006-07 33.20%
2007-08 19.14%
2008-09 64.04%
2009-10 34.39%
2010-11 -4.10%
39. Comparability of Bodhtree vis-à-vis software developer has been examined by the coordinate Bench of the Tribunal in Intoto Software India (P.) Ltd. (supra) and has ordered to exclude on the ground that the Bodhtree is not into software development services and its segmental data is not available.
19 ITA No.5922/Del/2012
40. Keeping in view the fact that Bodhtree is a product developer and into diversified function and no segmental data is available and its margin is highly volatile, it is not a suitable comparable vis-à-vis the taxpayer which is a routine software developer. So, in the given circumstances, we order to exclude Bodhtree from the final set of comparables for benchmarking the international transactions.
ZYLOG SYSTEMS LTD. (ZYLOG)
41.. The taxpayer sought to exclude Zylog from the final set of comparables for benchmarking the international transactions on the grounds inter alia that Zylog is in the development of software products having no segmental financials; that Zylog has undergone extra ordinary events during the year under assessment.
42. Ld. DR relied upon TPO/DRP in order to oppose the arguments addressed by ld. AR.
43. Perusal of the annual report of Zylog, available at pages 383 to 434 of the annual report compendium, particularly page 399, shows that in the intangible assets, Zylog has shown product development cost of Rs.1787.57 lakhs. So, it is a product company. From page 393, it is also proved that during the year under assessment, Zylog has acquired Anados Software Limited, a 20 ITA No.5922/Del/2012 UK based Life Insurance product company and Ewak Creative Compusoft Limited, Cheenai based Replacement Technology solution provider. Benefits from such acquisitions, as envisaged, include access to new clients, new geographical areas and new service offerings as well as an increase in per-capita revenue productivity.
44. Hon'ble High Court of Andhra Pradesh in case cited as CIT vs. M/s. Intoto Software India Pvt. Ltd. in ITTA No.233 of 2014 dated 27.03.2014 decided the identical issue of differences between a product and software development services provider in assessee's favour by returning the following findings :-
"Having heard both the parties and having gone through the material on record, we find that the TPO at page 37 of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available."
45. Furthermore, perusal of the profit & loss account of Zylog, available at page 425 of the annual report compendium, shows that its income from software development services and product 21 ITA No.5922/Del/2012 overseas is Rs.4,03,43,04,874/- as on 31.03.2007 and Rs.6,05,94,45,088 as on 31.03.2008 having no segmental detail. So, keeping in view the fact that Zylog is a product company with no segmental financials and had been into acquisition during the year under assessment, is not a suitable comparable for benchmarking the international transactions, hence order to be excluded.
GROUND NO.8
46. Ground No.8 is dismissed having not been pressed during the course of arguments.
GROUND NO.9
47. The taxpayer challenged trading of foreign exchange loss/ gain as non-operating item in nature by the TPO/DRP on the ground that the same is required to be treated as an item of operating revenue/cost in case of the taxpayer as well as comparables and relied upon the decision rendered by Special Bench of the Tribunal in ACIT vs. Prakash I. Shah (2008) 115 ITD 167 (Mum.)(SB) and Techbooks International (P.) Ltd. vs. DCIT - (2015) 63 taxmann.com 114 (Delhi - Trib.). 22 ITA No.5922/Del/2012
48. Now, the question arises for determination in this case is :-
"as to whether foreign loss/gain is part of the operating cost/ income while computing the profit level indicator for the tested party as well as comparables?"
49. Ld. DR relied upon TPO/DRP in order to oppose the arguments addressed by ld. AR.
50. The issue has already been set at rest by the coordinate Bench of the Tribunal in Techbooks International (P.) Ltd. (supra), the ratio of which is for determining the ALP foreign exchange loss / gain arising from the transaction of revenue nature are required to be considered as part of operating profit/cost of the assessee as well as that of the comparables. The ld.TPO while computing the OP/OC of the comparables treated the amount of foreign exchange gain/loss as non-operating item whereas in case of the taxpayer foreign exchange gain and loss has been treated as operating item. However, both the taxpayer as well as comparable companies is required to be on the same page for treating foreign exchange loss/gain arising from transactions of revenue nature as an operating item. So, the TPO is directed to compute the ALP accordingly. So, this ground is allowed for statistical purposes. 23 ITA No.5922/Del/2012 GROUND NO.10
51. Ld. TPO as well as Ld. DRP have denied the working capital with adjustment claimed by the taxpayer. The ld. AR for the taxpayer submitted that high levels of working capital create costs either in the form of incurred interest or in the form of opportunity costs and as such, no profit maximizing or entrepreneurial firm would hold working capital without a return and relied upon Rule 10B (3) of the Income-tax Rules, 1962 which are reproduced as under :-
"Rule 10B
3) An uncontrolled transaction shall be comparable to an international transaction if -
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or
(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences."
52. Ld. DR relied upon TPO/DRP in order to oppose the arguments addressed by ld. AR.
53. It is a settled principle of law that for reasonably accurate adjustments tested party as well as comparables should be on the 24 ITA No.5922/Del/2012 same page. However, so far as issue of working capital adjustment is concerned that the ld. TPO disallowed the same for lack of sufficient data as the audited accounts of the taxpayer do not show that it has received any advance from its AE. So, we are of the considered view that in the absence of any reliable data, working capital adjustment cannot be granted. So, the assessee is directed to provide complete computation to avail of the facility of working capital adjustment and thereafter TPO is directed to decide this issue afresh.
54. Similarly, so far as question of denial of risk adjustment to the taxpayer by the ld. TPO/DRP is concerned, the same has also been denied on the ground that the taxpayer has failed to provide any back up calculation for claim of risk adjustment. So, in the given circumstances, we are of the considered view that ld. TPO is to re-examine the issue on providing back up calculation by the taxpayer for the claim of risk adjustment. Consequently, ground no.10 is allowed for statistical purposes.
GROUNDS NO.11 & 12
55. AO made ad hoc addition of Rs.4,32,12,968/- on account of income from maintenance, enhancement and support services (advance billing / deferred revenue) by relying upon the earlier 25 ITA No.5922/Del/2012 precedent of AY 2007-08 qua which appeal has also been admitted by the Hon'ble High Court on question of law. Undisputedly, this issue has already been covered in favour of the taxpayer vide order passed by the coordinate Bench of the Tribunal in ITA Nos.584 & 585/Del/2006 and 322/Del/2007 for AYs 2001-02, 2002-03 and 2003-04 in M/s. UGS India Private Ltd. vs. ACIT, copy of which is available at pages 46 to 64 of the paper book, further relied upon in assessee's own case for AY 2007-08.
56. Ld. DR relied upon TPO/DRP in order to oppose the arguments addressed by ld. AR.
57. Coordinate Bench of the Tribunal while deciding the identical issue in assessee's own case in ITA Nos.584 & 585/Del/2006 and 322/Del/2007 (supra) as ground no.2 returned the findings in favour of the taxpayer as under :-
"5.1 The appellant sells the software products. In addition to the sale of software, the appellant, at the option of the customer, also provides Maintenance Enhancement & Support Services (ME&S Services). The revenue relating to the ME&S Services are recognized on monthly basis over a period when these services are to be rendered. Thus, the revenue for services which are to be provided after the end of the year is accounted for in books in the subsequent year when services are actually rendered.
5.2 The above procedure of accounting is consistently followed by the appellant and is also so declared in its Accounting Policy No.2 in the "Significant accounting policies and notes to the accounts" forming integral part of the audited balance sheet which was attached with the return of income.26 ITA No.5922/Del/2012
5.3 The above accounting procedure is stated to be based on Accounting Standard-9 "Revenue Recognition" issued by the ICAI.
The AO held that the entire amount raised in the bill is income of the year and to be taxed accordingly as (i) amount not separately shown in invoice; (ii) amount is uncertain and cannot be calculated; (iii) sales-tax return shows total amount as sale; (iv) No tax is deducted by payer on such sum; and (v) It is a device to defer payment of tax.
5.4 Learned counsel for assessee submitted that it is not correct to say that the amount of ME&S services is not determined. Where ME&S is provided alongwith the sale of software, the invoice contains one consolidated figure but the details of ME&S are invariably available in the details attached with the invoice. In any case, the period of ME&S is invariably mentioned on the face of the invoice. Where the ME&S is provided independently of sale of software, a separate invoice of ME&S is raised. This position was explained to the AO and CIT(A) particularly for assessment year 2003-04. Since the AO did not specifically asked for any clarification in the matter, there was no occasion to further explain the factual position during proceedings for Asstt. Year 2001-02. Since consolidated invoice is raised, entire amount is being shown as liable to sales-tax. For the same reason, there is no TDS. But after service-tax has been levied on ME&S, service tax is being duly charged. Reliance was placed on the decision of Treasure Island Resorts (P) Ltd. vs. DCIT, 90 ITD 814 (Hyd) wherein it was held as under:
"Reading them all together, the principle is that when service is provided on a continuing basis and the cost relating to the service falls in a different year, revenue should be recognized on a time basis. Going by this general import of item 6 in the appendix and the wording in the body of the Accounting Standard-9 itself, it is clear that the assessee conformed to the Accounting Standard-9 and as such, the book results deserve to be accepted.
In the light of the foregoing discussion, we are of the view that the AO is not justified in bringing to tax the entire membership fee collected to tax in the year under appeal. We, accordingly, set aside the impugned orders of the Revenue authorities on this aspect and direct the AO to modify the assessment accordingly."
5.5 The learned DR, on the other hand, relied upon the reasoning of learned CIT(A) extracted hereinabove. 27 ITA No.5922/Del/2012
6. We have considered rival submissions. On the basis of submissions made before AO and before us, it can be held that where the assessee sells the software/license with free warranty, full invoice amount is recognized as revenue. However, where the sale of software license is with extended period of warranty or with the paid maintenance enhancement and support services, extra amount is being charged though not separately mentioned in the invoice. However, the same can be measured compared to invoices for sale of same software whether MES services are included or not. Thus, when the assessee charges extra sum for MES services, the revenue in this regard can be recognized only after such services are rendered or the period of contract is over. Hon'ble Delhi High Court in the case of Uttam Singh Duggal & Co. vs. CIT, 127 ITR 21 recognized this principle of matching revenue with cost. On general principle, it was held that if no work is done in the year of receipt of sum, it has to be treated as kind of advance payment and when the work was done thereafter and expenditure in this regard is claimed, income to that extent will be taxable in' the subsequent year. Even if the' amount is not separately shown in invoice the effect remain that addition sum was charged for ME&S services. The amount is not uncertain not to be calculated. The amount can very well be arrived at best on the sale price of software sold with or without ME&S services. The sales-tax return cannot be a criteria to determine what is the income accruing or arising to the assessee. Even if the payer do not deduct tax at source, it will not determine the taxability or otherwise of the sum chargeable to tax. Thus, there is nothing like device to defer payment of taxes due but as per the recognized method of accounting of matching revenue with cost, the income accrues only in the subsequent year when such services are provided. This is in form of a provision for warranty claims which is also recognized by Hon'ble Delhi High Court in the case of CIT vs. Vintec Corporation P. Ltd., 278 ITR 337 wherein it was held that provision for warranties embedded in the sale price is an ascertained liability and to that extent, revenue need not be recognized. We accordingly hold that the amount treated as deferred revenue by the assessee is not to be brought to tax in the year under consideration but to be taxed in the year when such services are rendered or recognized as income by the assessee."
58. Ld. DR for the Revenue has failed to controvert the fact that the facts of the year under assessment are identical to the earlier years of AYs 2001-02, 2002-03, 2003-04 and 2007-08. So, in the given circumstances, by following the aforesaid order passed by 28 ITA No.5922/Del/2012 the coordinate Bench of the Tribunal, amount treated as deferred revenue is not brought to be taxed in the year under consideration but to be taxed in the year when such services are rendered or recognized a income of the taxpayer. So, grounds no.11 & 12 are determined in favour of the taxpayer.
GROUND NO.13
59. Ground No.13 qua levy of penalty u/s 271(1)(c) of the Act being premature in nature needs no specific findings. GROUNDS NO.14 & 15
60. Grounds No.14 & 15 qua levy of interest u/s 234B and 244A of the Act respectively need no specific finding being consequential in nature.
61. Resultantly, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in open court on this 22nd day of January, 2018.
Sd/- sd/-
(B.P. JAIN) (KULDIP SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 22nd day of January, 2018
TS
29 ITA No.5922/Del/2012
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A)
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.