TaxTMI 
TaxTMI 
TaxTMI 
2016 (10) TMI 1135
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....e 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 assessee filed objections before the ld Dispute Resol....
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....ent 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-ordinate bench of this tribunal in the case of Bucyrus India Pvt Ltd vs DCIT in ITA No. 616/Kol/2015 dated 15.10.2015. (xii) The ....
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....eopened 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 25.8.2014. In the case before the Hon'ble Karnataka High Court, there was no return pending and hence no reference to ld TPO could be made. It did not deal with pe....
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....er 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 the international transaction at this stage. In the initial years of implementation of these provisions and pending development of adequate data base, it would be appropriate if a small num....
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....ceive 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 assessee filed its return of income for Asst Year 2002-03 on 31.10.2002. The same was processed u/s 143(1) of the Act. The assessee received notices daed 1.4.2004 u/s 148 of the Act and 12.4.2004 u/s 92CA of the Act from the TPO seeking de....
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.... 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 proceedings. Their Lordships held that such a reference could not have been made under the scheme of the Act because the assessment proceedings had come to an end before the point of time when such a reference was made, and as such the reference itself was le....
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....nt 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 working capital adjustments to be carried out while determining the ALP and accordingly the difference in disputed income thereon is only Rs. 11,78,977/-, for which the tax effect would be less than Rs. 10 lacs. He provided the workings for Rs. 11,78,977/-being the difference in working ca....
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....at 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 justified in partially upholding the adjustment to ALP made by the ld TPO / ld AO in the facts and circumstances of the case. 5.1. The brief facts of this issue is that the Labvantage Solutions Private Limited (" LVS India" ) and Labvantage Solutions inc. ("LVS US" / "AE") are group companies as both are directly or indirectly held by TCG Lifesciences Ltd. LVS US is a global sol....
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....ctive 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 disallowance of the Royalty payment 3.1 The learned AO, DRP and TPO erred in determining the arm's length price of the royalty paid at 'NIL' while determining the amount of adjustment. 3.2 The learned AO, DRP and TPO also erred in not appreciating the separate benchmarking analysis done by Appellant, by virtue of which such payment of royalty by the Appellant to its AEs was determined at arm's length. 3.3 The learned AO, ....
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.... 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 Limited 3.21 4 Evoke Technologies Private Limited 20.82 5 Helios & Matheson Information Technology Ltd 22.58 6 L G S Global Ltd 17.70 7 Mindtree Ltd 14.48 8 Persistent Sytems Ltd 22.34 9 Powersoft Global Solutions Ltd 17.60 10 R S Software (India) Ltd 9.06 11 R Systems International Ltd 15.16 12 Sasken Communication Technologies Ltd 15.94 13 Tata Elxsi Ltd 18.86 14 Thirdware Solutions Ltd 22.05 15 Vama Industries Ltd 7.07 ARITHMETICAL MEAN 14.79% 5.5. The ld TPO ignored the segmental computation furnish....
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....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 segmental reporting, the company is also engaged in providing IT enabled services and no segmental income break up is available for the same. Thus it would not be correct to classify E-Infochips as a software development company. The ld AR stated that the ld TPO had obtained information u/s 133(6) of the Act wherein they had stated that they are only in IT sector, whereas their annual report states that they are in IT and IT enabled services. In case of this contradiction, the information available in public domain (i.e the annual report) should be considered. He also argued that the section 133(6) of the Act information was never confronted on the assessee in the show cause notice. It came directly only in the ld TPO's order. He also stated that in the following jud....
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.... 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 assessee company and comparable company is entirely different. He also argued that there exist abnormal circumstances in the said comparable. During the last 3 years, variations in margins earned shows an abnormal circumstances leading to huge fluctuations and supernormal profit , the margin earned by Infinite is 88.25% which is abnormally high. 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. Accordingly, he prayed for rejection of this comparable. Spry Resources India Pvt Ltd The ld AR argued that this company is functionally not comparable to the assessee. He argued that the s....
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....t 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 generated from such licenses earlier sold to third party customers. He argued that since such payment was integral to the operations of assessee, and in the nature of operating expenses, such transaction was aggregated with the provision of software design and development services transaction and benchmarked using TNMM as the Most Appropriate Method. Thus, owing to closely linked and integrated nature of said transaction, TNMM is the MAM for its evaluation. He placed reliance on the following decisions in support of his contentions :- (a) Hon'ble Delhi High Court in the case of CIT vs EKL Appliances Ltd reported in (2012) 24 taxmann.com 199 (Delhi) (b) Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P) Ltd vs CIT reported in (2015) 374 ITR 118 (Del) (c) Delhi Tribunal in the case ....
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.... 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 revenues and profitability post addition of this software sales and maintenance revenue. The details of the same are as below:- Financial Year Revenues Profit before Tax 2006-07 10,68,45,669 (94,71,976) 2007-08 12,48,44,081 1,63,12,532 2008-09 13,03,45,542 2,21,06,636 2009-10 14,16,86,146 2,80,93,792 He argued that while this is so, the observation of the ld DRP, that the assessee had not been able to establish how the payment of royalty to its AE had improved its domestic sales, is without any basis. The long term benefits derived by the assessee out of the royalty payments has been proved beyond doubt by the increase in revenues and profitability of the assessee . 6.3.6. He argued that what is effectively carried out by the assessee is only trading in software as far as this transaction is concerned. The assessee bought software from its AE and sold it locally to third party customers and 40% of it is given to the AE ....
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....th the assessee , he stated that this argument was never advanced by the assessee before the lower authorities and hence the same is to be rejected. Hence it has been rightly chosen by the ld TPO as a comparable. 7.2. With regard to second and comparables sought to be excluded i.e Infinite Data Systems Pvt Ltd (Merged) and Spry Resources India Pvt Ltd, and inclusion of one comparable i.e Akshay Software Technologies Ltd, he placed reliance on the order of the ld TPO and accordingly stated that the same had been rightly chosen as comparables by the ld TPO and rightly rejected by the ld TPO from the comparables respectively. 7.3. With regard to payment of royalty, he argued that the fact as to whether there was double addition was made due to entity level benchmarking may be directed to be verified to the file of the ld AO. 8. We have heard the rival submissions and perused the materials available on record including the paper books filed by the assessee. There is no dispute on the application of TNMM as the MAM with PLI of Net Cost Plus Margin. The controversy that revolves around us is only on the selection of comparables. First we shall address the dispute on account of Upward ....
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....ofile of the said comparable as evident from its annual report, that it is engaged in IT and IT Enabled Services. Even as per segmental reporting, the company is also engaged in providing IT enabled services and no segmental income break up is available for the same. Thus it would not be correct to classify E-Infochips as a software development company. We find that the ld TPO had obtained information from this company u/s 133(6) of the Act wherein the party had stated that it is engaged only in IT sector. Admittedly, the information obtained u/s 133(6) of the Act behind the back of the assessee and not even confronted with the assessee and came to the knowledge of the assessee only in the order u/s 92CA(3) of the Act. In these circumstances, we find lot of force in the argument of the ld AR that the information available in the public domain i.e the annual report, should be taken as correct. Moreover, we also find that the annual report is being circulated to the larger sections of the public in compliance with the provisions of Companies Act, 1956 and Listed Company regulations prescribed by SEBI. We also find that the co-ordinate benches of various tribunals had held that this c....
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....aware of the decision of the Co-ordinate Bench given in earlier assessment year on the reason that segmental reporting was not available. Be that as it may, since the said company is functionally different from Assessee's activities and in the absence of segmental information, we direct AO/TPO to exclude the above while working out the comparability analysis. We uphold the plea of Assessee in this regard. We also find that as stated earlier, the other decisions relied upon by the ld AR also had held that this comparable is functionally not comparable. We deem it fit and appropriate to consider the recent decision rendered in this regard. In view of the aforesaid finding and judicial precedent relied upon, we hold that the comparable chosen by ld TPO i.e EInfochips Bangalore Ltd is functionally not comparable with the assessee company. 8.3. Exclusion of Infinite Data Systems Pvt Ltd (Merged) We find that this company had reported NCP of 88.25% . 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 this company is having a different business model and engaged in provi....
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....s of company, it could not be selected as comparable to assessee engaged in software development. We place reliance in this regard on the decision of Hyderabad Tribunal in the case of Excellence Data Research (P) Ltd vs ACIT reported in ( 2016) 74 taxmann.com 13 (Hyd Trib) dated 12.9.2016 for Asst Year 2010-11 , wherein it was held that :- 8. Having regard to the rival contentions and the material on record, we find that the DRP has directed the AO to consider whether the extra ordinary event of amalgamation during the year is found to have an impact on the profits of the company. We find that instead of carrying out the exercise, the AO has simply followed the order of the TPO in holding that the fact of amalgamation on the margin of the said company has no effect on the margin of the said company. This, in our opinion, is not a correct approach of the AO. Where a direction has been given by the DRP to follow a certain procedures, the AO has simply followed the TPO order. Therefore, order of the AO on this issue needs to be set aside. In the case of Hyundai Motors India Engg. (P.) Ltd. (2015) 64 taxmann.com 442 (Hyd.-Trib.) which is also engaged in rendering of ITES to its AEs, ....
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....ly since the approval for amalgamation has been given by the Hon'ble High Court of Mumbai vide orders dated 21stAugust, 2009 and by the Hon'ble Karnataka High Court vide orders dated 6th February, 2010. This event would definitely have an effect on the profit margins of the said company and therefore, has to be excluded from the list of comparables as rightly done by the DRP. Therefore, we do not see any reason to interfere with the order of the DRP on this company also. Accordingly, ground No. 3 of the Revenue is dismissed". Since the order of the Tribunal in the case of Hyundai Motors India Engg. (P.) Ltd. (supra) for the same A.Y, we direct the AO/TPO to exclude this company from the final list of comparables. 11. TCS e-Serve International Ltd: As regards the comparability of this company with the assessee, the learned Counsel for the assessee submitted that the TCS international also provides software testing, verification and validation which are different from ITES services providers by the assessee. It is also submitted that the segmental information of TCS International are not available in the annual report. The exceptional circumstances of the company reported....
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....cial industry. We find from the annual report of this comparable enclosed in the paper book, that it is also engaged in software development activity which is quite evident from the income schedule of the said comparable. We find that the USA based 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 activity only. We find that this comparable i.e Akshay Software Technologies Ltd had been accepted as comparable in IT sector in the Co-ordinate Bench 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 it was held that :- 26. On perusal of the order of the Ld. T.P.O. , we find that the Ld. T.P.O. has rejected Akshay Software as a comparable to the assessee for determining the assessee's ALP on the basis that the Akshay Software is functionally different to the assessee. He has observed ....
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....t the assessee had carried out trading in software by purchasing the same from its AE and selling it locally to third party customers. We find in the instant case, the assessee had paid 40% of its local sales as royalty to its AE. This is duly supported by a Royalty Agreement which is part of the records and was filed before the lower authorities. We find that the assessee had not paid any royalty to its AE for the first four years in view of specific waiver obtained from its AE for the same. We find that this payment was integral to the operations of assessee, and in the nature of operating expenses, such transaction was aggregated with the provision of software design and development services transaction and benchmarked using TNMM as the Most Appropriate Method. We find that the table mentioned in the arguments of ld AR hereinabove 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. Admittedly, LVS Inc had granted the license to the assessee for which royalty payment has been made, pursuant to which the assessee was able to derive such revenues from third party customers. Henc....
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....and fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 9.2. We also find that this issue has been addressed by yet another decision of the Hon'ble Delhi High Court in the case of CIT vs Cushman and Wakefield (India) (P) Ltd reported in (2014) 46 taxmann.com 317 (Delhi) vide order dated 23.5.2014 , wherein it was held that the authority of ld TPO is to conduct a transfer pricing analysis to determine ALP and not to determine whether there is a service or not from which assessee benefits and therefore, the ld TPO cannot determine ALP of payments made by assessee to its AE at Nil taking a view that assessee did not derive any benefit from services rendered by AE. 9.3. Hence we hold th....