TaxTMI 
TaxTMI 
2016 (10) TMI 1135
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....ent proceedings . Hence the first question to be decided in this appeal is as to whether the reassessment proceedings have been validly initiated and framed as per law in the facts and circumstances of the case. 2.1. The brief facts of this issue is that the assessee company filed its return of income on 29.9.2009 and received intimation u/s 143(1) of the Act on 13.10.2010. No notice u/s 143(2) of the Act was issued on the assessee selecting the case for scrutiny. However, a reference was made by the ld AO to ld TPO who passed an order proposing an adjustment of Rs. 2,43,53,752/-to Arm's Length Price (ALP) determined by the assessee. Since no assessment proceeding was pending at that time in order to give effect to the order of the ld TPO, the ld AO reopened the assessment by issuing notice u/s 148 of the Act. In the reassessment proceedings, no fresh reference was made to ld TPO u/s 92CA(1) of the Act for determination of ALP in respect of international transactions of the assessee. The reassessment was completed by making an addition towards ALP to the tune of Rs. 2,43,53,752/-as made by the ld TPO and disallowance u/s 40(a)(ia) of the Act to the tune of Rs. 27,575/-. The asse....
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....r dated 29.1.2013 (which was done vide illegal reference) and made addition to that extent in the reassessment proceedings completed on 15.9.2014. (ix) The assessee preferred objections before the ld DRP against the said draft order of the ld AO contending the illegal reference made to ld TPO when no valid proceedings were pending and the ld AO adopting the said adjustment to ALP suggested in the old order us/ 92CA(3) of the Act and also objected that no fresh reference was made to ld TPO in the reassessment proceedings. Accordingly the validity of reassessment and addition made thereon to this extent was objected to by the assessee apart from the contesting the issue on merits. (x) The ld DRP passed an order on 24.6.2015 stating that the assessee is not an eligible assessee as defined in section 144C(15)(b) of the Act and accordingly the ld DRP cannot assume jurisdiction and directed the ld AO to proceed as per law. (xi) The ld AR argued that the entire addition of Rs. 2,43,53,752/-made in the reassessment based on ld TPO's order , which was passed vide illegal reference, deserves to be deleted , for which he placed reliance on the decision of the co-ord....
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....of Rs. 2,43,53,752/-which would constitute information enabling the ld AO to have reason to believe that income had escaped assessment. Accordingly, the ld AO reopened the assessment by issuing notice u/s 148 of the Act. Since the order of ld TPO is already on record, the ld AO thought it fit not to refer the case again to ld TPO for doing the same work in order to avoid multiplicity of proceedings and to reach finality in the same at the earliest. This earnest intention of the ld AO cannot be doubted with. With regard to the reliance placed by the ld AR on the CBDT Instruction No. 3 dated 20.5.2003, he argued that the said instruction exclusively relates only to ld TPO's order and not related to selection of case for scrutiny. He stated that the said circular was replaced subsequently in the year 2016. The assessee had not objected to the illegal reference to ld TPO as it is evident that the assessee had duly cooperated with the ld TPO proceedings. The decision rendered by this tribunal in the case of Bucyrus India Pvt Ltd supra in turn relied on decision of Hon'ble Karnataka High Court in the case of CIT vs SAP Labs Pvt Ltd in ITA No. 842 of 2008 and ITA No. 339 of 2010 dated 25.....
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....y the Central Board of Direct Taxes requires consideration. For the sake of convenience, the said Instruction No. 3 of 2003 dated 20.5.2003 para 2 is reproduced hereunder;- " In order to make a reference to the TPO, the Assessing Officer has to satisfy himself that the taxpayer has entered into an international transaction with an associated enterprise. One of the sources from which the factual information regarding international transaction can be gathered in Form No. 3CEB filed with the return which is the nature of an accountant's report containing basic details of an international transaction entered into by the taxpayer during the year and the associated enterprise with which such transaction is entered into, the nature of documents maintained and the method followed. Thus, the primary details regarding such international transactions would normally be available in the accountant's report. The Assessing Officer can arrive at prima facie belief on the basis of these details whether a reference is considered necessary. No detailed enquiries are needed at this stage and the Assessing Officer should not embark upon scrutinizing the correctness or otherwise of the price of....
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....nd hence cannot be relied upon by the lower authorities. 4.2. We place reliance on the CBDT Circular No. 549 dated 31.10.1989 which states that if an assessee, after furnishing the return of income does not receive a notice u/s 143(2) from the department within the prescribed time, he can take it that the return filed by him has become final and no scrutiny proceedings are to be started in respect of that return. In the instant case, at the time of issue of notice u/s 92CA of the Act (i.e reference to TPO), no return was pending on the basis of which notice u/s 92CA could have been issued. We place reliance on the decision of the coordinate bench decision of Pune Tribunal in the case of Maximize Learning Private Limited vs ACIT in ITA No. 2234/PN/2012 dated 2.2.2015 for Asst Year 2007-08, wherein it was held an assessing officer could make reference to the TPO u/s 92CA of the Act only after selecting the case for scrutiny assessment. 4.3. We also place reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT vs M/s Sap Labs pvt Ltd in ITA No. 842 of 2008 and ITA No. 339 of 2010 vide order dated 25.8.2014. " In this case, the assesse....
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....eal no. 842 /2008. Accordingly, it is dismissed. Consequently, the impugned order which is the subject matter of ITA 339/2010 which is a consequential order is also dismissed." 5. We find that the Learned AO having realized his mistake of not selecting the case for scrutiny sought to remain silent after receiving the Learned TPO's order dated 28.1.2014. We find that notice u/s 143(2) was also issued and served on the assessee in the reassessment proceedings. We find that in the reassessment proceedings, no fresh reference was made to the Learned TPO u/s 92CA(1) of the Act by the Learned AO. We hold that the action of using the old TPO order passed u/s 92CA(3) as an information for forming his opinion of reason to believe that income has escaped assessment within the meaning of section 147 of the Act also cannot be appreciated for reopening the assessment. In this regard, we find that the case law relied on by the Learned AR in the case of CWT vs Sona Properties reported in 327 ITR 592 (Bom) rendered by Bombay High Court is well placed. In the said case, the Assessing Officer had made a reference to the Departmental Valuation officer after the end of the assessment....
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.... no other addition could be made thereon. Accordingly, the entire reassessment proceedings deserve to be quashed in the facts and circumstances of the case. 2.5 In view of our above conclusion, we allow the ground no. 1 raised by the assessee by declaring that the reassessment order of the ld AO is bad in law and void ab initio. In view of this decision, the adjudication of other grounds becomes infructuous and hence no decision is given on the merits of the additions and on other grounds raised by the assessee. 2.6. In the result, the appeal of the assessee in ITA NO. 1051/Kol/2015 for the Asst Year 2009-10 is allowed. ITA No. 599/Kol/2015-Asst Year 2010-11-Revenue Appeal 3. At the outset, there was a delay of 16 days in filing the appeal before us by the revenue. In view of the concession given by the ld AR for condoning the same, the appeal of the revenue is hereby admitted and taken up for adjudication. 3.1. The ld AR stated that the tax effect in the appeal of the revenue is less than Rs. 10 lacs and accordingly stated that the appeal of the revenue is not maintainable. In this regard, he stated that the ld DRP gave relief to the assessee with regard to the work....
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.... Court in the case of Commissioner of Customs vs Indian Oil Corporation Ltd reported in 267 ITR 272 (SC) wherein their Lordships examined the earlier decisions of the Apex Court with regard to binding nature of the Circulars and laid down that when a Circular issued by the Board remains in operation then the revenue is bound by it and cannot be allowed to plead that it is not valid or that it is contrary to the terms of the statute. Hence we hold that the appeal(s) of the revenue deserve to be dismissed in terms of low tax effect vide Circular No.21 / 2015 dated 10.12.2015. Accordingly, this being a low tax effect case, we dismiss the appeal of the revenue in limine , as unadmitted, without going into the merits of the case. 3.5. In the result, the appeal of the revenue in ITA No. 599/Kol/2015 for the Asst Year 2010-11 is dismissed. ITA No. 617/Kol/2015-Asst Year 2010-11-Assessee Appeal 4. The Ground No.1 raised in the appeal of the assessee is stated to be not pressed by the ld AR. The same is reckoned as a statement from the Bar and accordingly the same is dismissed as not pressed. 5. The first issue to be decided in this appeal is as to whether the ld DRP is justifie....
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..... 715 Out of the above, the international transactions referred to serial (i) and (ii) alone are subject matter of appeal before us. The assessee used Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with a Profit Level Indicator (PLI) of Net Cost Plus (NCP) Margin . 5.3. The assessee has raised the following grounds before us in this regard:- "2. Determination of effective profitability of the Appellant from the international transactions. 2.1. The learned AO, DRP and TPO erred on facts is not taking cognizance of the domestic segment of the Appellant. 2.2. Accordingly, the learned AO, DRP and TPO erred on facts in including the expenses incurred towards domestic segment as part of the cost base, while calculating the effective Net Cost Plus Mark up ('NCP') earned by the Appellant from the international transactions with its Associated Enterprises ('AEs') 2.3. The learned AO, DRP and TPO failed to take cognizance that the "Domestic segment" of the Appellant is deemed to be at arm's length, since the same includes revenue from third-party customers under uncontrolled circumstances. 3. Erroneous disall....
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....of adjustment amount by the TPO 5.1. The learned AO, DRP and TPO erred in computing the adjustment amount at 14,776,387 by erroneously including the following: (a) Cost of domestic segment (b) Payment of royalty. 6. Initiation of penalty proceedings 6.1. The Appellant submits that based on the facts and the circumstances of the case, there was no basis for the AO to propose to initiate penalty proceedings under section 271(1)(c) of the Act." During the course of hearing, the ld AR stated that he is not pressing the Grounds 4.3 to 4.11 before us, which was also mentioned in his written submissions filed before us. Accordingly, those grounds (i.e 4.3 to 4.11) are dismissed as not pressed. 5.4. The assessee had used TNMM as the MAM with PLI of NCP margin and arrived at a set of 15 comparable companies with NCP margin of 14.79% vis a vis 44.94% of the assessee from its Export segment. The list of comparables selected by the assessee are as follows:- Sl. No. Name of the Company Weighted Average NCP (%) (FY 2008-2010) 1 Akshay Software Technologies Ltd 10.38 2 CG-Vak Software & Exports Ltd 4.59 3 Eforce India Private Limit....
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....b) Allowed exclusion of recovery transaction amounting to Rs. 1,37,88,142/-for determining the TP adjustment and thereby an upward adjustment in respect of software services provided to AE was made at Rs. 74,92,375/-. (c) Allowed working capital adjustment and therefore recalculated the ALP of TPO's comparables at 39.25%. 5.8. Incorporating the ld DRP's directions, the ld AO made a revised adjustment to ALP of Rs. 1,47,76,387/-as below:- Upward adjustment for software development Service (Sales to AE) 74,92,375 Upward adjustment for royalty 72,84,012 1,47,76,387 6. The ld AR stated that the main dispute lies here is in the selection of comparables. He prayed for exclusion of the following comparables chosen by the ld TPO :- (i) E-Infochips Bangalore Ltd ; (ii) Infinite Data Systems Pvt Ltd (Merged) ; and (iii) Spry Resources India Pvt Ltd E-Infochips Bangalore Limited The ld AR argued that this company is functionally not comparable to the assessee. He argued that as per the annual report of the said company, the business profile of the company is ambiguous as to the exact nature of the software services. Further, as per the segme....
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....hat the Holding Company M/s Infinite Computer Solutions (India) Limited signed an agreement (Build, Operate and Transfer Model) with Fujitsu Services Limited to set up Global Delivery Centers in India to provide offshore delivery capabilities to Fujitsu & Fujitsu's associated companies. Infinite Data Systems commenced its operations on 1st January 2009 and as per segment reporting disclosure, the company's operations predominantly relate to providing software technical consultancy services to its sole customer Fujitsu Services Limited. The ld AR argued that these facts have also been acknowledged by the ld TPO at page 77 of his order. Also, it would be worthwhile to note that Infinite Data Systems Pvt Ltd completed its three years contract with Fujitsu, post which, the business was transferred to Fujitsu and thus the company has been merged with its Holding Company-Infinite Computer Solutions (India) ltd during the financial year 2011-12. The ld AR argued that the assessee company is a service provider in area of software development whereas the comparable company Infinite Data Systems Pvt Ltd was created for purposes of transfer of business. The services and business model of a....
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....sed subsidiary of the company i.e Akshay Software International Inc. (Akshay US) is a registered partner of SWIFT selling SWIFT solutions and products as an extended arm of SWIFT in North America. Thus the contention of the ld TPO / ld AO is erroneous since it is clearly evident from the annual report of the comparable company itself that it is engaged in rendering software development services only. The ld AR also placed reliance on the decision of Delhi Tribunal in the case of Qualcomm India Pvt Ltd vs ACIT in ITA No. 5239/Del/2010 dated 10.6.2013 wherein Akshay Software had been clearly held to be functionally comparable . 6.2. He argued that with the aforesaid exclusions and inclusion of comparables with the list of other comparables chosen by the ld TPO, the assessee's margin would be clearly justified to be at ALP and hence no adjustment need to be made in the facts and circumstances of the case. 6.3. With regard to disallowance of Royalty payment of Rs. 72,84,012/-is concerned, he argued that during the relevant year under appeal, the assessee had paid royalty to its AE on the license sales made by it to the third party customers as well as on the maintenance revenue g....
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....re Sales & Maintenance Revenue) Additional benefit derived from third parties due to sale of software Royalty payment to US Benefit Benefit % (on sales) 2004-05 21,681,971 3,510,587 0 25,192,558 100% 2005-06 13,736,036 1,024,860 0 14,760,896 100% 2006-07 34,967,014 565,460 0 35,532,474 100% 2007-08 21,884,197 2,937,000 0 24,821,197 100% 2008-09 16,050,097 6,007,496 7,133,376 14,924,217 68% 2009-10 16,389,028 9173402 7,284,012 18,278,418 72% Total 124,708,343 23,218,805 14,417,388 133,509,760 90% The ld AR argued that the above table would prove that the assessee had derived benefits of around 90% in terms of additional revenue and minimal / no cost by virtue of paying royalty to its AE. He further argued that it would not have derived such revenues from third party customers if LVS Inc. had not granted such license to assessee. He further argued that under comparable circumstances, no third party would have given such license free of cost or allowed assessee to retain majority share of the revenue. He argued that there has been increase in the....
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....comparables. Accordingly, it was argued that the payment of royalty is at Arm's Length. 7. The ld DR filed written submissions wherein he had stated that the CBDT Circular No. 12 & 14 do not put any restrictions on the ld TPO. On the contrary , both the circulars clearly state that if the ld TPO finds that the data used by the taxpayer was not reliable or correct, then he can re-determine the ALP. Hence the ld TPO rejecting the Transfer Pricing report of the assessee and conducting a fresh search to determine the ALP cannot be faulted with. 7.1. With regard to comparable sought to be excluded by the ld AR i.e E-Infochips Bangalore Limited, on the basis of dispute on the exact nature of services in which such comparable was engaged, the ld DR argued that the ld TPO had obtained information u/s 133(6) of the Act wherein the said party had replied about their nature of services which had to be considered as a direct and authentic information. With regard to the argument of the ld AR that this information sought u/s 133(6) of the Act was not shared with the assessee , he stated that this argument was never advanced by the assessee before the lower authorities and hence the same i....
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....n arrived in such arithmetical mean would be lesser than the margins declared by the assessee and hence there would be no necessity to dispute the other comparables of the ld TPO and consequently no adjustment to ALP in this regard is required to be made. Hence the questions for our consideration would be as follows:- (a) Whether the assessee is justified in seeking for exclusions of three comparables chosen by the ld TPO viz (i) E-Infochips Bangalore Ltd ; (ii) Infinite Data Systems Pvt Ltd (Merged) ; and (iii) Spry Resources India Pvt Ltd , in the facts and circumstances of the case. (b) Whether the assessee is justified in seeking for inclusion of one comparable i.e Akshay Software Technologies Ltd to the comparables chosen by the ld TPO, in the facts and circumstances of the case. 8.2. Exclusion of E-Infochips Bangalore Ltd We find that this company had reported NCP of 71.92% . It is not in dispute that the assessee is engaged in software development. Hence comparable should also be in the companies engaged in the similar sector. We find from the business profile of the said comparable as evident from its annual report, that it is engaged in IT and IT En....
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....galore Ltd 8.3. After considering the rival contentions and perusing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable company for TP analysis. First of all, this company is engaged in both software development as well as ITES. Assessee being only captive service provider, the above company cannot be considered as comparable on functional basis. Not only that, as pointed out, segmental information pertaining to the above company is not available. As seen from the TP orders, documents placed on record, TPO relied on later year's annual report in extracting the information. Variation in profitability over the years alone cannot be a reason to exclude the company from comparability analysis but as rightly pointed, the absence of segmental information, how much profit earned was on the software development or ITES cannot be examined. In the absence of clarity on operational details and comparable company having diversified activities, we are of the opinion that this company cannot be chosen as a comparable company in Assessee's case in this assessment year. We are also aware of the decision of the Co-ordinate Bench gi....
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....u and thus the company has been merged with its Holding Company-Infinite Computer Solutions (India) ltd during the financial year 2011-12. We are inclined to agree with the submissions of the ld AR that this Comparable Infinite Data Systems Pvt Ltd was created for purposes of transfer of business. Hence the nature of services and business model of assessee company and comparable company are entirely different. Apart from this, we also find that there exist abnormal circumstances in the said comparable. During the last 3 years, variations in margins earned show an abnormal circumstances leading to huge fluctuations and supernormal profit , the margin earned by Infinite is 88.25% which is abnormally high. It was argued that such companies which are making more than twice the arithmetical mean margin as computed by the ld TPO should not be considered as comparable. The ld AR referred to page 591 of the Paper Book where the details of the fluctuation in the revenue, profit and margins has been provided. It is true that where company in which extraordinary events had taken place during the year like major acquisitions which had impact on profits of company, it could not be selected as c....
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....rmation available on Accentia Technologies Ltd., to demonstrate that the said company is into diversified knowledge process outsourcing activities. It is seen there from that the said company is involved in Healthcare documentation as well as receivables, management services including installation and maintenance of all software, hardware and band width infrastructure required for the same, deployment of man power and service delivery in all these areas. It is also seen that it is engaged in legal process outsourcing. From Schedule-IV showing the fixed assets of the assessee, it is also seen that the said company owns goodwill/brand/IPRs (Intellectual Property Rights). From the notes to the accounts, it is also seen that a subsidiary of the company Asscent Infoserve Pvt. Ltd., has been amalgamated with the company consequent to which, assets and liabilities of the erstwhile company were transferred and vested in the company w.e.f. 1st April, 2008 and the scheme has been given effect to in the accounts of the year. Therefore, it is clear that there is an extraordinary event in the case of Accentia Technologies Ltd., during the relevant financial year particularly since the approval ....
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....similar to assessee business. We find that the ld TPO while rejecting the comparable chosen by the assessee i.e Eforce India (P) Ltd, had mentioned in page 64 of his order that the said comparable is engaged into software consultancy service and accordingly the same is functionally not comparable with the assesse which is engaged in software development. Hence the ld TPO had consciously decided to exclude comparables engaged in software consultancy services. Hence on this ground, he ought to have engaged this comparable also i.e Spry Resources Pvt Ltd also which is engaged in software consultancy services. In view of this, we hold that the comparable chosen by ld TPO i.e Spry Resources India Pvt Ltd is functionally not comparable with the assessee company. 8.5. Inclusion of Akshay Software Technologies Ltd We find that this company had reported NCP of 10.38% . It is not in dispute that the assessee is engaged in software development. Hence comparable should also be in the companies engaged in the similar sector. We find that the ld TPO had rejected this comparable on the ground that it provides technical support for integration of SWIFT software to its clients of the user of ....
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....as comparable. We accordingly direct the Ld. T.P.O to accept Akshay Software as comparable to determine the Arms Length Price of the assessee. In view of the aforesaid findings and judicial precedent relied upon, we direct the ld TPO to include the aforesaid comparable i.e Akshay Software Technologies Ltd as functionally comparable with the assessee company. 8.6. Accordingly, we direct the ld TPO to exclude above three comparables i.e (i) EInfochips Bangalore Ltd ; (ii) Infinite Data Systems Pvt Ltd (Merged) and (iii) Spry Resources India Pvt Ltd and also direct to include one comparable i.e Akshay Software Technologies Ltd with the list of other comparables chosen by the ld TPO and determine the ALP of the assessee and accordingly decide whether any adjustment need to be made thereon, in accordance with law. Accordingly, the grounds raised by the assessee in this regard are allowed for statistical purposes. 9. Determination of ALP for Royalty at Rs Nil We find that the assessee had paid royalty of Rs. 72,84,012/-to its AE on the license sales made by it to the third party customers as well as on the maintenance revenue generated from such licenses earlier sold to third....
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....l. We place reliance on the decision of the Hon'ble Delhi High Court in the case of CIT vs EKL Appliances Ltd reported in (2012) 24 taxmann.com 199 (Delhi), wherein it was held that :- 22. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the asse....