M/s ACI Worldwide Solutions Private Ltd., Bangalore V. Asst.C.I.T., Bangalore

ITA 160/BANG/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 2041 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 2 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2020
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 19-02-2020
• Assessment Year: 2011-2012
• Appeal Filed On: 10-02-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A 160/BANG/2016 ASSESSMENT YEAR : 2011 12 M/S. ACI WORLDWIDE SOLUTIONS PVT. LTD., NO. 9, SALARPURIA CAMBRIDGE MALL, CAMBRIDGE ROAD, ULSOOR, BANGALORE 560 008. PAN NO : AAACV 7566 R VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1) (1), BANGALORE. APPELLANT RESPONDENT & IT(TP)A 211/BANG/2016 ASSESSMENT YEAR : 2011 12 ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1) (1), BANGALORE. VS. M/S. ACI WORLDWIDE SOLUTIONS PVT. LTD., NO. 9, SALARPURIA CAMBRIDGE MALL, CAMBRIDGE ROAD, ULSOOR, BANGALORE 560 008. PAN NO : AAACV 7566 R APPELLANT RESPONDENT APPELLANT BY : SHRI. PADAMCHAND KHINCHA, CA RESPONDENT BY : MS. NEERA MALHOTRA, CIT DR DATE OF HEARING : 19-02-2020 DATE OF PRONOUNCEMENT : 27-04-2020 PAGE 3 OF 34 IT(TP)A 160/BANG/2016 & IT(TP)A 211/BANG/2016 A. Y : 2011 12 PAGE 5 OF 34 IT(TP)A 160/BANG/2016 & IT(TP)A 211/BANG/2016 A. Y : 2011 12 PAGE 7 OF 34 IT(TP)A 160/BANG/2016 & IT(TP)A 211/BANG/2016 A. Y : 2011 12 PAGE 9 OF 34 IT(TP)A 160/BANG/2016 & IT(TP)A 211/BANG/2016 A. Y : 2011 12 ASSOCIATED ENTERPRISES FOR MORE THAN RS.15 CRORES A ND ACCORDINGLY REFERENCE TO TRANSFER PRICING OFFICER W AS MADE FOR DETERMINING. 2.1. ON RECEIPT OF REFERENCE, TRANSFER PRICING OFFICER C ALLED UPON ASSESSEE TO FILE ECONOMIC DETAILS OF INTERNATIONAL TRANSACTION ENTERED INTO BY ASSESSEE WITH ITS ASSOCIATED ENTERP RISES IN FORM 3 CEB. LD.TPO OBSERVED THAT, ASSESSEE IS A WHOLLY OW NED SUBSIDIARY OF ACI WORLDWIDE INC. AND IS ENGAGED IN BUSINESS OF DESIGNING, MANUFACTURING, MARKETING, LICENSING AND DISTRIBUTION OF COMPUTER SOFTWARE. LD.TPO OBSERVED THAT, ASSESSE E OPERATES AS A DEDICATED SOFTWARE DEVELOPMENT CENTRE TO ITS PARE NT AND ULTIMATE HOLDING COMPANY ACI AND ALSO PROVIDES MARK ET SUPPORT SERVICES TO ITS AE. 2.2. LD.TPO OBSERVED THAT, FOLLOWING WERE INTERNATIONAL TRANSACTION ENTERED INTO BY ASSESSEE: PARTICULARS RECEIVABLES (IN RUPEES) PAYABLES (IN RUPEES) PURCHASE OF SOFTWARE LICENSE -- 1,02,28,056/- PROVISION OF SOFTWARE DEVELOPMENT SERVICES 15,05,11,767/- -- RESEARCH AND DEVELOPMENT SERVICE 10,76,73,555/- -- PROVISION OF SALES AND MARKETING SERVICES 22,96,41,343/- -- TOTAL 49,80,54,721/- 1,02,28,056/- LD. TPO OBSERVED THAT, ASSESSEE USED TNMM AS MOST A PPROPRIATE METHOD FOR SOFTWARE DEVELOPMENT SERVICES AND SALES AND PAGE 11 OF 34 IT(TP)A 160/BANG/2016 & IT(TP)A 211/BANG/2016 A. Y : 2011 12 15. PERSISTENT SYSTEMS LTD ., 23.91% 16. RS SOFTWARE (INDIA) LTD ., 11.99% 17. RS SYSTEMS INTERNATIONAL LTD ., (SEGMENTAL) 12.10% 18. SASKEN COMMUNICATIONS TECHNOLOGY LTD ., 22.79% 19. SEVEN TECHNOLOGIES LTD ., (CONSOLIDATED SEGMENTAL) 17.43% 20. THINKSOFT GLOBAL SERVICES LTD ., 11.54% 21. THIRDWARE SOLUTIONS LTD ., 21.75% 22. ZYLOG SYSTEMS LTD ., 20.23% AVERAGE MARGIN 13.60% B. SALES REPRESENTATIVE SERVICE SEGMENT S L. N O. COMPARABLES MARGIN 1. ACCESS INDIA ADVISORS LTD ., 6.62% 2. EDCIL (INDIA) LTD ., (SEGMENTAL) 3.80% 3. HT MUSIC AND ENTERTAINMENT CO. LTD ., 3.98% 4. ICRA MANAGEMENT CONSULTING SERVICES LTD., 4.72% 5. IDC (INDIA) LTD ., 11.27% 6. ICC INTERNATIONAL AGENCIES LTD ., 44.08% 7. INDIA TOURISM DEVELOPMENT CORPORATION LTD., (SEG.) 1.28% 8. INDUS TECHNICAL AND FINANCIAL CONSULTANTS LTD., 9.53% 9. INHOUSE PRODUCTIONS LTD ., (SEGMENTAL) 2.42% 10. INMACS MANAGEMENT SERVICES LTD ., 17.22% 11. PRIYA INTERNATIONAL LTD ., (SEGMENTAL) 19.36% AVERAGE MARGIN 11.07% PAGE 13 OF 34 IT(TP)A 160/BANG/2016 & IT(TP)A 211/BANG/2016 A. Y : 2011 12 2.5. LD.TPO THUS COMPUTED PROPOSED ADJUSTMENT BEING DIFFERENCE BETWEEN THE MARGINS TOWARDS ARMS LENGTH PRICE OF THE TRANSACTIONS AS UNDER: PARTICULARS PROPOSED ADJUSTMENT SOFTWARE DEVELOPMENT SERVICE SEGMENT RS.2,86,12,979/- MARKETING SERVICE SEGMENT RS.4,08,83,190/- 2.6 AGGRIEVED BY PROPOSED ADJUSTMENT, ASSESSEE RAISED OBJECTION BEFORE DRP. DRP UPHELD OBJECTION REGARDIN G INCLUSION OF CERTAIN COMPARABLES UNDER SOFTWARE DEVELOPMENT S EGMENTS. DRP UPHELD OBJECTIONS RAISED BY ASSESSEE IN RESPECT OF CERTAIN COMPARABLES, AND UP HELD THE REST UNDER BOTH SEGMEN TS. 2.7 AGAINST DIRECTIONS OF DRP LD.AO, PASSED FINAL ASSES SMENT ORDER, AGAINST WHICH BOTH ASSESSEE AS WELL AS REVEN UE ARE IN APPEAL BEFORE US. 3. AT THE OUTSET LD.AR SUBMITTED THAT, IN REVISED GROU NDS OF APPEAL, ASSESSEE SEEKS EXCLUSION/INCLUSION OF FOLLO WING COMPARABLES UNDER BOTH SEGMENTS: A. SOFTWARE DEVELOPMENT SEGMENT A.1 COMPARABLE SOUGHT FOR EXCLUSION: PERSISTANT SYSTEMS & SOLUTIONS LTD., PERSISTANT SYSTEMS LTD., SASKEN COMMUNICATION TECHNOLOGIES A.2 COMPARABLES SOUGHT FOR INCLUSION: EVOKE TECHNOLOGIES LTD., R.S.SOFTWARE (INDIA) LTD., B. SALES AND MARKETING SUPPORT SERVICES B.1 COMPARABLE SOUGHT FOR EXCLUSION: PAGE 15 OF 34 IT(TP)A 160/BANG/2016 & IT(TP)A 211/BANG/2016 A. Y : 2011 12 (A) COMPUTER PROGRAMMING AND RESEARCH AND DEVELOPMENT SERVICES; AND, (B) SALES AND MARKETING SERVICES. 2. CONTRACT FREE PAYABLE BY AES TO ASSESSEE WILL BE CO MPUTED AS UNDER: (A) COST +12% BASIS ON COMPUTER PROGRAMMING AND RESEAR CH AND DEVELOPMENT SERVICES; AND, (B) COST +10% ON SALES AND MARKETING SERVICES. (C) IT IS ALSO BEEN AGREED BY THE PARTIES THAT FOR THE PURPOSES OF COMPUTATION OF COST, SHALL INCLUDE ALL COST REAS ONABLY AND NECESSARILY INCURRED BY ASSESSEE IN PERFORMANCE OF THEIR SERVICES UNDER THE MSA AND SHALL BE SUCH AS A RE DETERMINED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN INDIA INCLUDING DEPRECIATI ON, ORDINARY AMORTISATION AND EXTRAORDINARY EXPENSES BU T EXCLUDING CAPITAL COSTS AND INCOME TAX. 3. IT IS ALSO BEEN AGREED BETWEEN THE PARTIES THAT ALL INFORMATION INCLUDING SPECIFICATIONS, DESIGNS, DRAW INGS, RESULTS FROM COMPUTER PROGRAMS AND ANY SOFTWARE THA T MAY BE DEVELOPED DURING THE COURSE OF WORK AND DURING T HE TENURE OF THE CONTRACT SHALL BE EXCLUSIVELY THE PRO PERTY OF ASSOCIATED ENTERPRISES AND IT SHALL RETRAINING ABSO LUTE RIGHT OR ANY PATENTS, COPYRIGHTS, TRADE SECRETS THAT MAY EMERGE FROM THE RESULTS OF THE WORK CARRIED OUT UNDER THE CONTRACT. 4. THE CONTRACT BETWEEN THE PARTIES SHALL REMAIN IN FO RCE UNLESS TERMINATED BY EITHER PARTY THERETO. PAGE 17 OF 34 IT(TP)A 160/BANG/2016 & IT(TP)A 211/BANG/2016 A. Y : 2011 12 INTO SYSTEM DEVELOPMENT AND SUPPORTS ASSOCIATED ENTERPRISES IN MARKETING. 3.3.2 RISKS ASSUMED: ASSESSEE HAS IDENTIFIED MANPOWER RISK TO BE THE RIS K TO WHICH ASSESSEE IS EXPOSED. IT HAS BEEN SUBMITTED THAT ALL OTHER RISK LIKE OPERATIONAL RISK, MARKET RISK, PRODUCT LIABILITY RI SK, FOREIGN EXCHANGE RISK, IDLE CAPACITY S, RECEIVABLE COLLECTI ON OR CREDIT RISK ARE ALL BORN BY THE ASSOCIATED ENTERPRISES. 3.3.3 ASSETS EMPLOYED: EXCEPT FOR ROUTINE ASSETS LIKE COMPUTERS FURNITURE S AND FIXTURES ARE OWNED BY ASSESSEE, ALL OR ANY INTELLECTUAL PROP ERTY RIGHTS THAT GETS DEVELOPED IN THE PROCESS OF SOFTWARE DEVELOPME NT AND/OR RESEARCH SERVICES ARE OWNED BY THE ASSOCIATED ENTER PRISES. 3.3.4 CHARACTERISATION: BASED ON ABOVE FAR ANALYSIS UNDER BOTH SEGMENTS, AS SESSEE CAN BE CHARACTERISED AS CONTRACT SERVICE PROVIDER, FOR SOFTWARE DEVELOPMENT AND MARKETING SUPPORT SERVICE SEGMENT, THAT ASSUMES LESS THAN NORMAL RISK ASSOCIATED WITH CARRY ING OUT ITS BUSINESS. ASSESSEES APPEAL: 4. GROUND NOS. 1-3 ARE GENERAL IN NATURE AND THEREFORE DO NOT REQUIRE ANY ADJUDICATION. 5. GROUND NOS. 4-6: LD.AR SUBMITTED THAT ASSESSEE WISHES TO CHALLENGE INCLUSION OF 3 COMPARABLES ON THE BASIS O F FUNCTIONAL DISSIMILARITIES, BEING ; SOFTWARE DEVELOPMENT SERVICE SEGMENT (FOR EXCLUSION ) PERSISTENT SYSTEMS AND SOLUTIONS LTD., PAGE 19 OF 34 IT(TP)A 160/BANG/2016 & IT(TP)A 211/BANG/2016 A. Y : 2011 12 LD. AR SUBMITTED THAT, THERE IS LACK OF SEGMENTAL A CCOUNTING IN FINANCIALS OF THIS COMPANY. HE ALSO SUBMITTED THA T, THERE ARE NO BIFURCATIONS BETWEEN SERVICES RENDERED BY THIS COMP ANY. IS HAS BEEN SUBMITTED THAT, THIS TRIBUNAL WHILE CONSIDERING THIS COMPARABLE FOR YEAR UNDER CONSIDERATION IN VARIOUS CASES OBSERVED THAT, DURING RELEVANT YEAR, THIS COMPANY D EVELOPED ITS OWN SOFTWARE PRODUCTS, AND ITS REVENUE INCLUDED LIC ENSING OF SOFTWARE PRODUCTS. LD. CIT-DR SUBMITTED THAT, THIS COMPANY IS INTO SOF TWARE SERVICES AND PRODUCTS. AND SEGMENTAL ACCOUNTING OF SOFTWARE SERVICES AND PRODUCTS ARE AVAILABLE FOR YEAR UNDER CONSIDERATION. WE HAVE PERUSED SUBMISSIONS ON THE BASIS OF RECORDS PLACED BEFORE US. IT IS OBSERVED THAT, ASSESSEE DEVELOPED SOFTWARE DU RING THE YEAR, AND HAS EARNED ROYALTIES FROM SALE OF PRODUCTS. THI S COMPANY ALSO EARNED REVENUES FROM LICENSING OF PRODUCTS. IT IS ALSO OBSERVED FROM THE NOTES TO THE ACCOUNTS OF THIS COM PANY THAT THE SEGMENTAL INFORMATION IS PROVIDED ON CONSOLIDATED F INANCIAL STATEMENTS. IT IS ALSO OBSERVED THAT THIS COMPANY O WNS SOFTWARE DEVELOPED BY IT, ON WHICH DEPRECIATION IS CLAIMED. THUS, THIS COMPANY HAS BEEN CHARACTERISED ITSELF AS ENGAGED IN PROVIDING OUTSOURCED PRODUCT DEVELOPMENT SERVICES TO INDEPEND ENT SOFTWARE VENDORS AND ENTERPRISES. IT HAS BEEN CHARA CTERISED TO HAVING EARNED SIGNIFICANT PORTION OF ITS REVENUES F ROM EXPORT OF SOFTWARE SERVICES AND PRODUCTS. THUS FUNCTION, THE ASSETS OWNED BY THIS COMPANY AND RISK ASSUMED ARE NOT COMPARABLE WITH THAT