TaxTMI 
TaxTMI 
2016 (11) TMI 1402
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....-tax, Central Circle - 6 (I), Mumbai ['Learned AO'], under Section 143(3) r.w.s 144C(13) of the Income- tax Act, 1961 ('Act') (' Assessment order'), in pursuance of the directions issued by Dispute Resolution Panel - 2 ('Hon'ble DRP'), Mumbai, on the following grounds: On the facts and circumstances of the case and in law, the Learned AO, based on the directions of the Hon'ble DRP has: General Ground I. erred in assessing the total income of the Appellant at Rs. 65,05,53,290 against Rs. 38,75,66,510 as computed by the Appellant in its return of income; Transfer Pricing Grounds 2. erred in making a transfer pricing adjustment of Rs. 26,29,86,783 to the total income of the Appellant on the premise that the international transactions entered by the Appellant with its associated enterprises (' AE') were not at arm's length; Reference made to the Transfer Pricing Officer 3. erred in referring the Appellant's case to the Learned Transfer Pricing Officer ('TPO') under Section 92CA(1) of the act, without satisfying the conditions specified therein; Rejecti....
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....ilter and no segmental breakup of its activities are available, disregarding the fact that the company meets both the aforesaid filters and segmental details are available in public domain; 12. erred in rejecting Quintegra Solutions Limited as a comparable company on the basis that the company is functionally different and has substantial related party transactions, disregarding the fact that the company is engaged in providing software services similar to the Appellant and has related party transactions well within the prescribed limits. 13. erred in rejecting Saven Technologies Limited as a comparable company on the basis that it has substantial related party transactions without appreciating that the consolidated financial statements of the company was used by the Appellant wherein the impact of related party transactions is eliminated; Additional Comparables introduced by the Learned TPO 14. erred in considering Acropetal Technologies Limited as a comparable without appreciating that the company is functionally different, owns significant intangibles and has earned supernormal profits and/ or having exceptional year of performance during FY 2....
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....y rationale/ basis for arriving at the said mark-up; Interest under Section 234B of the Act of Rs. 6,05,83,706 24. erred in levying interest of Rs. 6,05,83,706 under Section 234B of the Act; 25. without prejudice to the above, erred in computing interest under Section 234B at Rs. 6,05,83,706 instead of Rs. 5,14,69,706; Interest under Section 234C of the Act of Rs. 53,67,503 26. erred in levying interest under Section 234C of the Act on assessed income without appreciating that the interest under section 234C is applicable on returned income; Penalty Proceedings 27. erred in initiating penalty proceedings under Section 271 (1)(c) of the Act. Each of the above ground of appeal is without prejudice to and independent of one another. The Appellant craves leave to add, alter, amend or delete the above ground of appeal at or before the time of hearing of the appeal, so as to enable the Hon'ble Income tax Appellate Tribunal to decide this appeal according to law. REVENUE'S GROUNDS OF APPEAL:- 1. Whether, on facts and circumstances of the case, the DRP is justified in directing the assess....
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....mpany is of a risk mitigated captive service provider for its associated enterprises. For the year under consideration, it filed a return of income declaring a total income of Rs. 38,75,66,510/-, which was subject to scrutiny assessment. The Assessing Officer noted that assessee had undertaken international transactions within the meaning of section 92B of the Act on account of Provisions of software development services and Recovery of expenses (service charges) and as a consequence the matter was referred to the Transfer Pricing Officer under section 92CA(1) of the Act for determination of the arm's length price of such international transactions. The Transfer Pricing Officer passed an order under section 92CA(3) of the Act dated 29/01/2015, wherein he worked out an adjustment of Rs. 36,49,98,330/- to the stated value of international transactions as under:- (i) Provision for software development services - Rs.33,30,47,046/- (ii)Recovery of expenses (Service Charges) - Rs. 3,19,51,284/- Total : Rs. 36,48,98,332/- 4.1 The Assessing Officer passed a draft assessment order dated 11/2/2015 under section 143(3) r.w.s. 144C of the Act proposing an adj....
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....ternational transactions of Provision of software development services provided by the assessee during the year is Rs. 359,61,45,404/-, which has been bench-marked by adopting the 'Transactional Net Margin Method' (TNMM) as most appropriate method; and, the selection of the TNM method has not been disturbed by the Transfer Pricing Officer. The assessee's Operating Profit margin to Total Cost ratio is 13.16% which is also not in dispute. In it's Transfer Pricing Study, assessee had selected a set of comparables, whose average profit margin was within the +/-5% range vis-a-vis assessee's margin and, therefore, the plea of the assessee was that no adjustment is required to be made to the stated value of the international transactions in order to determine it's arm's length price. The Assessing Officer, however, has determined an amount of Rs. 23,10,35,499/-, which was required to be added so as to bring the stated value of the transactions to its arm's length price relating to the international transactions for Provision of software development services. On this aspect assessee has raised multiple Grounds of appeal but in the course of hearing, arguments have been confined to ....
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.... is a hardware related activity. Notably, the Annual Report reveals that all the activities have been clubbed and considered as single reportable business segment, and segmental data for software services is not available so as to be used for benchmarking the transactions which are being tested. On the contrary, in so far as the activity of the assessee, which is under benchmarking is concerned, it relates to pure software development services and it does not involve sale or development of software products or hardware. It is also quite evident that M/s.E-Infochips Limited is undertaking I.T enabled services, which also is distinct from the software development activities undertaken by the assessee. In fact, at the time of hearing, Ld. Representative for the assessee had relied upon the decision of the Delhi Bench of the Tribunal in the case of Saxo India Pvt. Ltd. vs. ACIT, ITA No.6148/Del/2015 dated 5th February, 2016, wherein under an identical situation, M/s.E-Infochips Limited has been found to be incomparable to a concern engaged in rendering pure software development services. Notably, the Tribunal has referred to the Annual Report of the said concern and made the following ....
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....ssessee which does not own any intangibles; further, that the said concern has earned super-normal profits; and, therefore, the said concern is quite distinct in terms of the Functions, Assets and Risks (FAR) profile. 9.1 In this context, Ld. Departmental Representative has defended the stand of the Revenue by referring to the discussion in the order of the Transfer Pricing Officer, wherein it is stated that the said concern is "mainly engaged in software products and broadly comparable to that of the assessee." It is further pointed out that the DRP has also rejected the plea of the assessee for exclusion of the said concern because the activities were found to be similar to that of the assessee i.e. providing software development services. 9.2 On this aspect, we have carefully considered the rival submissions. A pertinent point raised by the assessee is to the effect that on the basis of level of respective turnovers, the said concern is incomparable. It has been pointed out that the turnover of the assessee is to the tune of Rs. 359,61,45,000/-, whereas M/s. Infosys Limited has a turnover of about Rs. 25,385.00 crores for the year under consideration. In this context, it w....
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.... its functional profile being different, against which the Department has not preferred any appeal to the Tribunal. It is therefore, contended that in the absence of any change in facts, the DRP ought to have rejected the said concern in this year too. 9.5 In our considered opinion, qualitatively speaking, the activities undertaken by M/s.E-Infochips Limited are not comparable to the pure software development services undertaken by the assessee as a captive service provider to its associated enterprises. Factually, it is also emerging that there is no segmental break-up available with respect to the production and sale of software products undertaken by the said concern, which is an aspect incomparable to the activities of the assessee. For the said reasons, we do not find any justification for inclusion of the said concern and the same is hereby directed to be excluded from the final set of comparables. Thus, on this aspect also assessee succeeds. 10. The next point argued by the assessee is way of Ground of appeal No.19, whereby it is pointed out that Wipro Technology Services Ltd., has been wrongly included as a comparable without appreciating that the said concern is func....
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....the case of Saxo India Pvt. Ltd.(supra), wherein the said concern has been directed to be excluded from the set of comparables by noticing the aforesaid peculiar facts. Our attention has drawn to the following discussion in the order of the Tribunal in the case of Saxo India Pvt. Ltd.(supra):- vii) Wipro Technology Services Ltd. " 16.1. The assessee objected to the inclusion of this company in the list of comparables by arguing that apart from this company being functionally different and the availability of insufficient segmental information, there were also significant related party transactions. The TPO did not accept the assessee's contention of the related party transactions and proceeded to include it in the final set of comparables. 16.2. We have heard the rival submissions. Page 57 of the TPO's order is reproduction of the assessee's contention about the related party transactions as under :- "Wipro Technology Services Limited (formerly Citi Technology Services Limited) ('the Company') was incorporated on 15 September, 2004. The entire share capital of the Company was held by Citicorp Banking Corporation, a company incorporated under laws....
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....terprises. Section 92B(2) provides that: `A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise'. On going through the prescription of sub-section (2) of section 92B, it is clearly borne out that a transaction with a non-AE shall be deemed to be a transaction entered into between two AEs if there exists a prior agreement in relation to the relevant transaction between the third person and the AE or the terms of the relevant transaction are determined in substance between the third person and the AE. When we consider section 92B(2) in combination with Rule 10A(a), it follows that the transaction between non-AEs shall be construed as a transaction between two AEs, if there exists a prior agreement in relation to the relevant transaction between third person and the AE. If ....
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....rned super-normal profit @ 52.09% on total cost and such features also make it incomparable to the assessee company. 11. The Ld. Departmental Representative appearing for the Revenue has not disputed the factual matrix brought out by the assessee but referred to the discussion by the Transfer Pricing Officer to include the said concern in the final set of comparables. According to the Transfer Pricing Officer, the said concern has derived income from Software Development and Technology Infra Services and, therefore, it is a good comparable. 11.1 Having carefully considered the rival submissions, in our considered opinion, the said concern deserves to be excluded from the final set of comparables. It is quite clear that the comparable transactions executed by Wipro Technology Services Ltd. are in terms of an arrangement with related parties at the time of initiation of the arrangement, though in the relevant period, the relationship had undergone a change. The Delhi Tribunal in the case of Saxo India Pvt. Ltd.(supra) has clearly brought out that in the light of the structuring of the transaction, the transactions executed by Wipro Technology Services Ltd. do not qualify to be ....
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.... any mark-up. Such reimbursements, which totalled to Rs. 31,95,12,842/- , were in the nature of cost of travel, accommodation, visa expenses, per diem and other day to day expenses. On being show caused by the Transfer Pricing Officer as to why such recoveries be not subject to service charge of 10%, assessee explained that it was a standard practice to recover certain out of pocket expenses incurred during the course of rendering services to the clients on a cost to cost basis and that it was only for administrative convenience that the payments towards such expenses were initially made by the assessee and later on recovered. The Transfer Pricing Officer was not satisfied with the explanation furnished by the assessee. The Transfer Pricing Officer observed that there was an element of service in such an arrangement and further noted that such expenses were recovered by the assessee from its associated enterprises after a certain time lag, during which period it had to bear the financial costs. For the aforesaid reasons, the Transfer Pricing Officer added 10% mark-up as means to compensate the assessee which came to Rs. 3,19,51,284/- and such amount was determined as income in t....
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....e by the assessee and thereafter, recoveries were made from the associated enterprises. Before the DRP, assessee also pointed out that such expenses, which are recovered by it from its associated enterprises, are in-turn recovered by the associated enterprises from the ultimate clients on a cost to cost basis. In this context, assessee furnished sample copies of debit notes raised by it on its associated enterprises alongwith copies of the corresponding debit notes raised by the associated enterprises on the ultimate clients. The aforesaid was canvassed by the assessee to substantiate that there was one to one co-relation and that the entire exercise did not involve any element of profit or mark-up in the hands of the associated enterprises. The aforesaid material is placed at pages 518 to 612 of the Paper Book and which was also before the lower authorities. At the time of hearing, the Ld. Representative for the assessee had also referred to page 613 to 645 of the Paper Book, wherein are placed copies of assessee's arrangement with the associated enterprises and also the sample agreements between the associated enterprises and the ultimate clients, which prescribe that all impugne....