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Harman Connected Services 1
Harman Connected Services 1
IT(TP)A No.49/Bang/2019
Assessment Year : 2014-15
ORDER
Per N V Vasudevan, Vice President
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integration, release and post release support. The assessee is also engaged in
trading of the infotainment systems, where the assessee purchases
professional loudspeakers, audio special effect equipment, audio mixing
consolers, consumer electronics and microphones and headphones from its
Associate Enterprises (AEs) to be sold to domestic third-party customers.
6. Aggrieved, the assessee filed its objections before the DRP which,
vide its directions dated 24.09.2018, rejected the assessee’s objections to a
large extent while granting marginal relief.
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8. Aggrieved by the final assessment order, the assessee has filed the
appeal before this Hon’ble Tribunal. We will deal with the addition made
on account of determination of Arm’s Length Price (ALP) in the SWD
services segment, trading segment and thereafter the Corporate Tax issues
raised by the assessee in its appeal, in that order.
The Net mark-up on cost earned by the assessee (as reflected in the
TP Order):
10. Both the assessee and the TPO chose Transaction Net Margin
Method (TNMM) as the Most Appropriate Method (MAM) for determining
ALP. The profit level indicator chosen for the purpose of comparing
assessee’s margin with that of comparable companies was OP/OC. The
assessee’s OP/OC was 19.64%. The assessee chose 9 comparable
companies whose average arithmetic mean profit margin was 14.22%. The
assessee therefore claimed that the price received from the AE was to be
treated as at arm’s length under section 92 of the Act. The TOP accepted 2
out of 9 comparable companies chosen by the assessee and he on his own
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The following companies were directed by the DRP to be excluded from the
list of comparables by accepting the contentions of the assessee:
14. The DRP upheld the action of the TPO in not granting any
adjustment towards the differences in working capital (“WC Adjustment”)
of the assessee and the comparable companies. The AO passed the
impugned final assessment order in line with the directions of the DRP in
which the SWD services TP adjustment was reworked to Rs.5,49,84,884/-.
Aggrieved by the aforesaid addition, the assessee is in appeal before the
Tribunal. Briefly, the grounds in the appeal which are being pressed are as
follows:
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(ii) That the DRP erred in upholding the exclusion Akshay Software
Technologies Ltd., and Maveric Systems Ltd. (Ground Nos. 1(l) and
(n)).
15. As far as ground Nos. 1(f), (g), (i) and (k) and Ground No. 8 in the
appeal are concerned, the assessee in these grounds seeks exclusion of
Infosys Ltd., Larsen and Toubro Infotech Ltd., Persistent Systems Ltd. and
Thirdware Solutions Ltd. from the list of comparables.
This company earns income from both rendering software services and
development of products. Despite rendering diverse services, there are no
segmental details in respect of the services rendered. The company provides
end-to-end business solutions like business consulting, technology,
engineering and outsourcing services. In addition, the company offers
software products and platforms for banking industry. The company also
invests in products which helped the company establish itself as a credible
IP Owner. The company owns seven Edge products/platforms and six other
product based solutions. The company leverages on its premium banking
solution ‘Finnacle ®’. The company owns significant brand value and
focuses on immense brand building. For this purpose, it incurs significant
brand building expenses, which goes to help the company have a premium
pricing for its services. The company also heavily focuses on research and
development activity and incurs significant expenditure for this account.
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This company deals with software products and renders aftermarket service
management services, integrated Information Technology (‘IT’) service
management Software as a Solution, business process management
implementation services, cloud computing, consulting, enterprise
integration, geographical information system and infrastructure management
services. Despite rendering these diverse services, the segmental details of
the various services and products are not available. The company’s business
segments are divided into service cluster, industrial cluster and telecom
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17. We find that this company is consistently excluded from the final list
of comparables in cases of assessees which are placed similar to the
assessee. Reliance in this regard is placed on the decisions of this Hon’ble
Tribunal in the cases of LG Soft India Pvt. Ltd. v. DCIT (Order dated
27.09.2019 passed by this Hon’ble Tribunal in M.P. No. 95/Bang/2019 in
IT(TP)A No. 3122/Bang/2018 for the assessment year 2014-15), EMC
Software and Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019
passed in IT(TP)A No. 3375/Bang/2018) and Brocade Communications
Systems Pvt. Ltd. v. DCIT (Order dated 19.02.2020 passed by this Hon’ble
Tribunal in IT(TP)A No. 79/Bang/2019), wherein in the cases of the
assessee which is similar to the assessee, the company was directed to be
excluded. We therefore direct that this company should be excluded from
the final list of comparables.
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18. We find that this Tribunal in the cases of LG Soft India Pvt. Ltd. v.
DCIT (Order dated 28.05.2019 passed by this Hon’ble Tribunal in IT(TP)A
No. 3122/Bang/2018 for the assessment year 2014-15), EMC Software and
Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019 passed in IT(TP)A
No. 3375/Bang/2018) and Brocade Communications Systems Pvt. Ltd. v.
DCIT (Order dated 19.02.2020 passed by this Hon’ble Tribunal in IT(TP)A
No. 79/Bang/2019), wherein in the cases of assessee which is placed similar
to the assessee, this company was directed to be excluded. Consequently,
we direct submitted that this company is not comparable to the assessee and
ought to be excluded from the list of comparables for the above reasons.
19. We find that this company is consistently excluded from the final list
of comparables in cases of assessees placed similar to that of the assessee.
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21. In this regard, it was submitted that firstly, perusal of the functions of
the company listed in its annual report shows that the company is
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functionally similar to the assessee. The website of the company states that
the company is engaged in rendering IT services, which are in the nature of
SWD and caters to the needs of corporate bodies, banks and financial
institutions. Further, it is submitted that the income from commission and
sale of software licenses constitutes a meagre 0.5% of the total revenue and
therefore, the same would not have any impact on the profitability of the
company.
22. It was submitted that the action of the DRP in upholding the
exclusion of this company on the basis that it incurs foreign branch expenses
indicating that the business model adopted by it is different is erroneous as
the TPO did not apply the onsite development filter. Therefore, the action of
the DRP is arbitrarily rejecting Akshay on this count, without applying the
filter at a uniform threshold across all companies is erroneous and
unsustainable. In any event, it is submitted that foreign branch expenses per
se do not indicate onsite development. There is no difference in the business
model adopted by the company and the assessee, and without prejudice, it
was submitted that the difference if any, would not have any impact on the
profitability of the company.
23. We find that this Tribunal in the cases of EMC Software and
Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019 passed in IT(TP)A
No. 3375/Bang/2018) and Brocade Communications Systems Pvt. Ltd. v.
DCIT (Order dated 19.02.2020 passed by this Hon’ble Tribunal in IT(TP)A
No. 79/Bang/2019), wherein in the case of an assessee which placed similar
to the assessee, the comparability of this company was remanded to the
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24. We find that this Tribunal in the cases of EMC Software and
Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019 passed in IT(TP)A
No. 3375/Bang/2018) and Brocade Communications Systems Pvt. Ltd. v.
DCIT (Order dated 19.02.2020 passed by this Hon’ble Tribunal in IT(TP)A
No. 79/Bang/2019), wherein in the case of an assessee which is placed
similar to the assessee, the company was remanded to the TPO. We
therefore remand the question of comparability of this company to the
TPO/AO for consideration afresh.
25. Ground No. 1(e) projects the grievance of the assessee regarding non-
granting of working capital adjustment. The assessee submits that that Rule
10B(3) of the Income-tax Rules, 1962, itself categorically provides that an
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26. Therefore, in the light of the settled proposition of law that necessary
adjustments are to be made to the margins of comparables to give effect to
the differences in the working capital positions of the tested party and of the
comparables, the TPO ought to have given the assessee the benefit of the
same. We direct the TPO/AO to give working capital adjustment in
accordance with law.
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Gross profit earned by the assessee in the Trading Segment (as reflected
in the TP study):
Since the profit margin of the assessee was higher than that of the
comparable companies, the assessee claimed that the price received from the
AE should be regarded as at Arm’s Length.
29. The TPO did not accept assessee’s choice of MAM and he chose
TNMM as MAM for the reason that data for comparability under RPM
required many details that may not be available in public domain. Apart
from the abve, the TPO also held that the assessee performs more functions
than a normal distributor and therefore RPM is not MAM. The TPO
thereafter chose the following comparable companies under TNMM.
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31. The assessee filed objections before the DRP against the aforesaid
addition suggested by the TPO which was incorporated by the AO in the
Draft Order of Assessment. The DRP summarily rejected the contention of
the assessee challenging the application of TNMM as opposed to RPM
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adopted by it. The DRP rejected the contentions of the assessee seeking
exclusion of incomparable companies and inclusion of comparable
companies, while granting marginal relief by directing exclusion of Intec
Infonet Pvt. Ltd. While determining the adjustment to the trading segment,
the TPO had taken into consideration the revenue of the assessee at entity
level as opposed to transaction level, which the assessee objected to before
the DRP. The DRP rejected the assessee’s contention and upheld the action
of the TPO is determining the adjustment at entity level.
32. The AO passed the impugned final assessment order in line with the
directions of the DRP in which the TP adjustment was reworked at Rs.
11,25,36,877/-. Aggrieved by the said addition, the assessee is in appeal
before the Tribunal.
33. The grounds in the appeal which are being pressed are as follows:
(ii) That the lower authorities erred in rejecting the transfer pricing
methodology adopted by the assessee in its TP study viz. RPM
and erred in adopting TNMM. (Ground No. 7).
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(xi) Usart Technologies India Pvt. Ltd. (Ground No. 2(l)); and
34. We shall take up for consideration ground No. 2(a) in the appeal re.
characterization and Ground No. 7 re. application of MAM. In this regard,
we find the following are the functions performed, assets employed and
risks assumed by the assessee (as available in the TP study at page 586
of the paperbook) :
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The assessee is responsible for determining the price at which the goods
are sold to customers in India. The pricing structure is mainly dependent
on the product margin. The assessee fixes its prices in accordance with a
published price list. The prices may be changed to meet specific
customer demands. The assessee is responsible for negotiating sales
contracts.
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Inventory management:
Contract Risk: In respect of the sales made to third party customers, the
assessee enters into contracts with third-party customers and hence, bears
the contract risk, However, in relation to import of traded goods from its
AEs, the assessee does not bear any contract risk.
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Market Risk: The products imported by the assessee are sold to third
party customers in India and thus, it would bear normal market risks
associated with the trading of cables in the domestic market.
Price Risk: The assessee bears the price risk in relation to sale of goods
to third-party customers. The AEs are not exposed to this risk.
Credit Risk: The assessee bears the credit risk in respect of its sales to
third party customers as it enters into contracts in its own name. The AEs
are not exposed to this risk.
35. From a reading of the above, it is clear that the assessee undertakes
routine distributor functions. However, the TPO, erroneously held that the
assessee cannot be ascribed as a routine trader who merely purchases and
sells goods. The TPO arrived at this erroneous conclusion by referring to so
called page 13 of the TP study, wherein it is stated that the company is also
responsible for installation, training services to independent third party
customer and also renders additional services like after sales support and
warranty services. However, it is pertinent to note that page 13 of the
assessee’s TP study nowhere lists out the above contents, and more
importantly, the assessee does not render any such additional services.
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Therefore, this finding of the TPO is clearly contrary to the material placed
on record and is wholly baseless. In any case, even if such services were to
be provided, that does not alter the function of the assessee being a
distributor of products.
36. The laws by now are well settled that in the case of a routine
distributor who does not perform any value-added services to the product.
RPM is the MAM. The additional functions performed by the assessee as
stated by the TPO/DRP will not make the assessee as not a trader. The true
test is value addition to the product that is sold by the assessee as a trader.
These is no such value addition to the product and therefore the assessee has
to be regarded as a pure trade only. Since the assessee is merely a routine
trader of services, without any value addition, RPM is the MAM.
37. As already stated, the law is well settled that MAM in the case of
trader is RPM, reliance in this regard is placed on the following decisions:
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40. Corporate tax issues arising in the appeal: Ground No. 11 re.
restriction of depreciation claimed on computer software: In this
ground, the assessee is challenging the action of the Revenue in restricting
the depreciation claimed on computer software at 25% instead of 60%, by
holding that ‘computer software’ is license eligible for depreciation at the
rate of 25%. The Respondent arrived at this conclusion by holding that
under Appendix-1 to the Income-tax Rules, 1962 (“the Rules”), what is
eligible for depreciation at the rate of 60% is ‘computer including computer
software’ indicating that the computer software which is eligible for
depreciation at 60% is the software which is embedded in the computer. The
DRP upheld the action of the AO.
41. It was submitted before us that the interpretation adopted by the lower
authorities is contrary to the provisions of the Rules. It was submitted that
Note No. 7 to Appendix-1 defines the term ‘computer software’, in terms of
which, a computer software means any computer program recorded on any
disc, tape, perforated media or other information storage device. The
definition does not make any distinction between a software embedded in a
computer or otherwise. In fact, the medium of storage of the software not
being restricted to a computer itself demonstrates that any computer
software is eligible for depreciation at 60%. Further, a computer software
cannot be used in isolation and independent of a computer. Reliance in this
regard was placed on the following decisions:
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42. We have considered the submission and we find that the ITAT,
Chennai, in the case of Computer Age Management Services (supra) dealt
with identical issue and has held as follows:
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20. We have considered the rival contentions and perused the orders of
the authorities below. Nature of items on which assessee had claimed
depreciation @60% are listed hereunder:-
What we find from the above description is that all these were nothing
but items in the nature software or software applications. Entry No.5
coming in III of Part A in New Appendix I clearly says that computer
included computer software. Note 7 of the Appendix, defines computer
software as any computer programme recorded in any information
storage device. We are therefore of the opinion that assessee was
eligible to claim depreciation at the rate of 60% on the above items.
Orders of the lower authorities on this issue are set aside and the claim
is allowed. Ground No.4 of the assessee stands allowed.”
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(Amounts in Rs.)
Covered Sales
% increase as compared 303% 50% 12%
to previous year
Details of Warranty
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Provisions
Opening as on April 1
- - - -
As per financials
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46. The learned Counsel for the assessee submitted that the entire basis
on which the Revenue authorities proceeded to make the impugned addition
i.e., on the basis that the provision created was much more than what was
utilized, is erroneous. In this regard, the learned Counsel for assessee drew
our attention to a letter dated 28.05.2018 filed before the DRP on
28.05.2019, wherein the assessee has explained that it sells amplifiers, loud
speakers, microphones, soundcraft, Studer and signal processing equipment
and these products / equipment are subject to a warranty for periods ranging
upto 6 years. The provision is created on past experience and on a scientific
basis at 0.6% for amplifiers loud speakers and signal processors and of 0.3%
for microphones, 0.2% for sound craft and at 1.3% for Studer. The learned
counsel therefore submitted that the provision created at a fixed percentage
of sales is based on historical trends and empirical evidence.
47. The DRP had confirmed the disallowance on the basis of the chart
above by stating that the amount of utilization is much less than the
provision created. The panel took FY 2012-13 data where the utilization of
Rs.4,30,259 was compared with the provision created for the year
Rs.54,75,988 to conclude that the % of utilization is at 7.8% which does not
justify the amount of provision created as a % of sales. In this regard the
learned counsel submitted that the warranty provision is created for the
entire period of warranty which would depend on the nature of product.
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Drawing reference from the letter submitted before the DRP, the learned
counsel demonstrated for example that Amplifier has warrant of 5 years and
3 years whereas Studer has a warranty of 1 year only. Therefore the
utilization of warranty for 1 year cannot be compared with provision for
warranty which is created for the entire period of 6 years warranty period.
The annexures to the letter submitted to the DRP give a complete break up
for all the items sold by the assessee like loudspeaker, microphones etc.
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Pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/-
(PADMAVATHY S) (N.V. VASUDEVAN)
Accountant Member Vice President
Bangalore,
Dated: 30.06.2022.
/NS/*
Copy to:
1. Assessees 2. Respondent
3. CIT 4. CIT(A)
5. DR 6. Guard file
By order
Assistant Registrar,
ITAT, Bangalore.