TaxTMI 
TaxTMI 
2017 (12) TMI 1117
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....d AO under section 143(3) read with section 144C and read with the order passed by the Learned Transfer Pricing Officer (hereinafter referred as 'TPO'), under section 92CA(3) of the Act is bad in law and void ab-initio, 1.2. That the Learned DRP erred in not holding that the order of TPO and the draft order of the AO (in so far it relates to transfer pricing proceedings) are void ab initio as the conditions of section ne (3) of the Act have not been satisfied. 2, Determination of arm's length price by the AO, TPO and DRP for Management Support Services received by the Appellant On the facts and circumstances of the case, the Learned AO, DRP and TPO erred in rejecting the transfer pricing analysis undertaken by the Appellant with respect to the Management Support Services without appreciating the contentions, arguments, voluminous documentary evidences and data put forward by the Appellant during the course of the proceedings before them, and in doing so, have grossly erred in - 2.1 Making an adjustment of Rs. 2,027,159,953 to the Arm's Length Price (hereinafter referred as ALP') of the international transaction relating to Man....
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....ting to IT services received by the Appellant and in not accepting the ALP of the international transaction as recorded in the books of account of the Appellant; 3.2 Concluding that the IT services received by PIL from the AE are in the nature of stewardship services leading to direct benefit to the AE and no proximate benefit to the Appellant; 3.3 Concluding the arm's length price for IT services paid by the Appellant to be Nil; 3.4 Completely disregarding the benefits received by the Appellant on receipt of such IT services and not appreciating that such IT services are prerequisite for Appellant's business which have significantly assisted appellant in achieving its daily operating efficacy; and 3.5 Completely ignoring the fact that the tangible evidences furnished during the assessment proceedings which unambiguously demonstrate that the Appellant has significantly utilized those IT infrastructures and systems in its daily operations. 4. Rule of consistency 4.1 The Learned AO, DRP and TPO erred in disallowing the payments made for management support services and IT services by the Appellant in the year under appeal w....
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....9. The Learned AO, DRP and the TPO erred in law and on facts in not considering the application of multiple-year data while computing the margins of the comparable companies, having regard to the provisions of Rule 10B(4) of the Rules. 6. Variation of 5% from the arithmetic mean. 6.1 The Appellant reserves the right for the benefits arising out of the proviso to Section 92C(2) of the Act. 7. Depreciation on moulds 7.1. The Learned AO and DRP erred in law and on facts in disallowing Rs. 2,67,54,530 being excess depreciation to the tune of 15% claimed by the Company on moulds. 7.2. The Learned AO and DRP erred in law and on facts in disallowing the excess depreciation on moulds without taking cognizance of the provisions of the Act read with Income-tax Rules, 1962. 7.3. The Learned AO and DRP erred on facts in holding that the moulds are not used for the purpose of the business of the Company and are not used in rubber/plastic factory. 8. Short credit of tax deducted at source 8.1. The Learned AO erred in granting credit of tax deducted at source of Rs. 3,71,65,130 instead of Rs. 4,84,89,927, thereby resulting in....
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....as concluded by the assessee that it international transactions of the Consumer Lifestyle division relating to the distribution function are in compliance with the arm's length principle. Healthcare Philips Healthcare's activities are organized across five business i.e. Imaging System, Clinical Care Systems, Home Healthcare Solutions, Healthcare Informatics and patient Monitoring, Customer Services. A benchmarking study was conducted using TNMM as the most appropriate method and it was concluded by the assessee that its international transactions of the Healthcare division relating to the distribution function are in compliance with the arm's length principle. Lighting Lighting business spans the entire lighting value chain - from lighting sources, electronics and controls to full applications and solutions. It consists of Lamps, Consumer Luminaries, Professional luminaries, Lighting Electronics and controls, Automotive Lighting, Special Lighting Applications etc. A benchmarking study was conducted using TNMM as the most appropriate method and it was concluded by the assessee that its international transactions of the Lighting division relating to the distribution....
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....trends on the world market), labeling, packaging, shipping and forwarding, long term export business and international public tendering and purchasing from third parties; b. Advice and support with respect to the supply of requirements of the company from other sources, if Philips is prevented from fulfilling such requirements of the company. c. Financial, accounting and auditing matters relating to such subjects as: i) Accounting and auditing principles and methods; ii) Budgeting methods; iii) Capital structure, loans, exchange risks, financial research, warranties and guarantees, credit management, the establishment and management of finance and lease companies and all further banking activities, including longterm finance plans; iv) Developments of data processing; d. Fiscal and legal matters, including patents, trademarks and customs duties, particularly in international transactions; e. Personnel matters, particularly with respect to: i) The selection and training of personnel; ii) An adequate personnel policy; f. Insurances; g. Admittance at the company's specific reque....
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....ch of its division/ business segments. As such it was claimed by the assessee before the AO that : 1) The services were actually received. 2) Services received were directly beneficial to assessee and not to any other AE. 3) There was operational efficiency in the working of the assessee on account of services rendered by AE. 4) The services rendered by the AE were not in the nature of shareholders/ stewardship activity. The assessee in support of its claim also filed detailed submission demonstrating the allocation of cost of Management support services to it. The assessee also filed auditors certificate certifying that these cost were calculated on the basis of Management support service agreement dated 22nd October 2004 with AE. The auditor has confirmed that they conducted their examination in accordance with international standards on Assurance Engagements. In the above certificate, inter alia, the auditor has certified: o Cost of concern activities as per division as a percentage of relevant world turnover; o Calculation factor regarding sub-division organization cost on the basis of production; o Cost of conce....
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....e and specific economic and market conditions prevailing in the Indian market. The AO also observed that there should not be any mark up on cost. The TPO accordingly held the ALP for services provided by the AE to the assessee under the Management Support Services agreement ("MSSA") to be Nil and made the addition to the total income. 8. Aggrieved assessee preferred an appeal to Ld. Dispute Resolution Panel (DRP for short) wherein it was submitted that the TPO did not appreciate the fact that the AE provided services to the whole group and the cost was allocated to all the group entities using defined allocation keys in a scientific way which was also certified by KPMG. Further, the assessee also submitted a GSA Transfer Pricing documentation wherein the mark up of 10% was benchmarked and the same was also proved to be at arm's length. Since the AE provided services to group companies which inter-alia were located in Asia Pacific region including the assessee, the comparables were chosen from Pan Asia region. The TPO failed to appreciate this aspect. The rationale for using comparables from Pan Asia region was to substantiate that the Pan Asian companies, providing services simi....
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....inciple. This means that the charge for intragroup services should be that which would have been made and accepted between independent enterprises in comparable circumstances. Consequently, such transactions should not be treated differently for tax purposes from comparable transactions between independent enterprises, simply because the transactions are between enterprises that happen to be associated." Hence, the contention of the TPO that no markup should have been charged is totally erroneous. However the ld. DRP rejected the contentions of the assessee & confirmed the order of the TPO by observing as under:- "DRP's Findings: The ground no's 2 & 3 and their sub grounds 2.1 to 2.9 and 3.1 to 3.6 respect of. Management Support Services (MSS for short) and Information Technology Services (ITS for short) are taken up together for disposal as a common theme runs through them. The elementary objection of the A' was that the AO miserably failed to appreciate the fact that the MSS &. ITS were continuously flowing services received by the A' from its AEs to add muscles to and improve the daily operational efficiencies of the A' in India. The business c....
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.... company's services would have been w1lling to pay on account of such services being indispensable. 11) The services relate to day to day management of the business operations including planning services for particular operations and provision of technical advice. 12) By such activities the parent company establishes personnel or other policies of the group and review and monitor the performance of the subsidiary. 13) These are duplicative services which do not provide any benefit to the recipient enterprises but only lead to incidental and not intended benefits. 14) Such services do not enhance the economic and commercial value of the recipient enterprise. " Against the above backdrops, the intra-group services availed of by the A' were examined by us from the following angles:- 1. Sum & substance of the agreement entered into by the A' relating to Intra-Group Services (IGs in short) 2. Identification of each & every service. 3. Amount paid for each service 4. Contemporaneous documentary evidence to demonstrate that such services were actually received. 5. Justifying the need for such....
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....fore us and the TPO's discussion to ascertain whether the mark up was influenced by any of the following factors:- a) Whether the provider of such services also provides the same services to another entity at the ALP and the nature of such a charge. b) The financial impact of provision of such service to the provider and recipient of the same on the profitability of the entities involved. c) The efficiency and capability of the provider of the service in comparison to another entity that could be providing the same service? d) Any non-routine activity that could be indentified during the course of provisions of such services. e) If these sources have been centralised in order to achieve cost efficiency which could benefit the provider and recipient of the service. f) Whether the provision of such a service is peculiar or the main function of the provider of the service. With the above facts in mind the evidence and submissions filed by the A' were examined by us. Contrary to the above stipulations &-requirements collated the A' filed agreement & sample bills only which upon a perusal demonstrated that the ne....
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....t services on sample basis which is running from pages 1 to 55 and placed on record. 3. The ld. AR also submitted that the in the earlier assessment year the Hon'ble ITAT in the own case of the assessee in ITA No. 1141/Kol/2016 for the AY 2009-10 vide order dated 5.4.2017 was pleased to delete the addition made by the TPO and confirmed by the Ld. DRP. The expenses were claimed on the basis of same management support services agreement i.e. 22nd October 2004. The copy of the order is placed on pages 642 to 683 of the PB. 4. The ld. AR also submitted that the ld. DRP did not make any adjustment in the management support service expenses in the AY 2010-11, 2012- 13 and 2013-14. The copies of the orders are placed on pages 741 to 940 of the PB. 5. The ld. AR also submitted that there was no change in the management support services Agreement made 22nd October 2004 between the assessee & AE. On the other hand the ld. DR submitted the written submission. The written submission is reproduced hereunder:- "The Indian Transfer Pricing regulations explicitly cover the transactions in the nature of provision of services, including provision of market researc....
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....would never have entered into an agreement for receipt of services the terms of payments of which would be independent of the nature and volume of service. This ruling reiterate the aforementioned principle that distinguishes a services from other business activities. Shareholder / custodial activities: The activities of a parent company primarily as an investor of capital or a shareholder of the subsidiary which are mainly undertaken for the benefit of the group's shareholders are considered as shareholder activities. It also covers activities involving compliance of regulatory, legal, and reporting requirement of the parent companies. A third party would never require such services and so would never make payments for them. For example: Activities in relation to consolidation of accounts by the parent company would constitute shareholders services, requiring no remuneration for the costs incurred. * Activities providing incidental or remote benefits: In a situation where an entity receives incidental benefits attributed solely to it being part of the MNE group, and not because of any specific activity being performed, the same requires no remuneration. Similarly, an ....
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....rt, it is that part of the economic value which is attributed to its difference over alternatives. It is very common to find an Indian subsidiary of an MNE group receiving some centrally provided services, for instance to gain economies of scale through the concentration of activities. These services may vary from being very simple administrative functions to more complex industry specific functions. The decision to provide certain services centrally may also be determined by the need to have the best practices implemented across geographies. Thus it can be said that the needs and benefits of Intra-group service arrangements is driven by the necessity to achieve operational efficiency, improve business operations, standardize policies, procedures and controls that are conducive to the MNE group's business operations. Documentary evidence in support of Intra-group services where a payment has been made for an inbound service, a taxpayer is expected to provide documentary proof of tangible benefit accrued on account intra-group services received. The following documents are essential for any taxpayer to support the charges for intra-group services: * Service agr....
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....nsfer of assets decisions; Presentations on usage of financial reporting and group record management software and databases; Treasury management strategy and guidance; and Email correspondence between the AE and third party banks in lieu of negotiations of interest rates, loans, credit lines etc. Correspondences highlighting the legal assistance in the form of emails and draft contracts; Guidance received on hiring a foreign counsel; - Guidance on legal system, prevailing in a foreign jurisdiction where the service recipient has a business interest; Assistance regarding setting up an overall legal policy. Business development • Presentation and correspondences depicting formulation of business development strategy, identification of business opportunities in new markets, acquisition and strategy alliance, identification of customer base, assistance in negotiation etc.; business proposals for new customer prepared by the service provider; market research report received from service provider. Tax • Memos and presentations received containing recommendation and advise on various tax implications in respect of foreign operations; Insights into pot....
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....h is sensitive to the features of the individual case, contains safeguards against manipulation and follow sound accounting principles and be capable of producing charges or allocations of costs that commensurate with the actual or reasonably expected benefits to the recipient of service, 'OECD further stresses that to satisfy' arm's length principle, one needs to have an allocation method that leads to a result that is consistent with what comparable independent enterprise would have been prepared to pay. Arm's length pricing of Intra-group services Before coming to the question of determining the ALP, it is essential to establish the following: * The business activity qualifies as an intra-group service; * The cost of such intra-group service commensurate with its benefits; * There exists sufficient documentary evidence to justify such benefits; and * A prudent and reasonable charge out mechanism has been established; Once all of the above conditions are satisfied, one should proceed with choosing the most appropriate method for benchmarking the transaction depending upon the facts and circumstances of each case. ....
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.... 10. We have heard the rival contentions & perused the materials available on record. In the instant case the TPO has treated the MSSA received by the assessee as stewardship services and for the benefit of AE. Accordingly the TPO valued the ALP of these services at NIL value. The order of the TPO was subsequently confirmed by the Ld. DRP. However we note that the assessee has provided the details of the benefit derived by it from the MSSA received from AE at the time of assessment proceedings. However the order of the TPO is silent on this aspect. Similarly we also note that the Revenue in the own cases of the assessee pertaining to other assessment years as discussed above has accepted claim of MSSA of the assessee. Besides we also note that the Hon'ble ITAT in the own case of the assessee has decided impugned issue in favour of assessee in ITA No.1141/Kol/2016 for the AY 2009-10 vide order dated 5.4.2017. The relevant extract of the order is reproduced below : "4. We have heard the rival submissions and perused the materials available on record including the paper book of the assessee. We find that the ld AR referred to the Agreement entered into by the ....
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....edge as specified above, familiarize themselves with the organization of the Philips Concern and with working methods used by it or receive advice on specific matters in the fields described above; h. sending at the Company's specific request such experts from Philips to the Company's offices as may be agreed between the parties for such period or periods as may be agreed between them to advise the Company on matters as mentioned above; i. any other similar matters which the Company may reasonably refer to Philips or which Philips itself may deem appropriate. 4.1. The ld AR also brought to our notice page 19 6 of the Paper Book containing the functions performed as below:- Functions are defined as the activities that each of the entities participating in a particular transaction performs as a normal part of their operations. Functions can be divided into broad categories: - strategic management functions are those activities that determine the overall strategy and organization of the firm ; - corporate service functions assist in the day-to-day management of the organization (e.g. finance, human resources, information systems, e....
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.... in the said reply dated 11.1.2013 before the ld TPO which is also enclosed as Exhibit II in the Paper Book filed by us. The ld TPO simply replied in his remand report filed before the ld DRP to these emails and the reply of the assessee by stating that the services rendered are only in the nature of control, supervisory and monitoring functions. The assessee in turn filed rejoinder to this remand report by specifically pointing out the benefits derived from each of the services and also by objecting to the remand report of the ld TPO by stating that the ld TPO had not assigned any reason for concluding that the services are in the nature of control, supervisory and monitoring functions. We find that the assessee had specifically replied that it was benefitted by substantial cost reduction on an overall basis by utilizing the services rendered by KPENV pursuant to MSSA. The details of these benefits derived are enclosed in pages 965 to 981 of the Paper Book. The ld AR also drew our attention to the order of the ld DRP dated 23.12.2013 passed in the hands of KPENV for the Asst. Year 2009-10 (enclosed in page 1018 to 1043 of Paper Book), wherein the ld DRP agreed that KPENV had rende....
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....We also find that the assessee had paid service tax of Rs. 14,87,24,134/- on payment of Management Support Service Charges of Rs. 125,27,30,863/-. 4.3. We find that the ld DR argued that assessee had not proved that services were received by the assessee and had derived commercial and economic benefits out of the MSSA. He argued that only general reply was given by the assessee with regard to the benefits derived. He argued that these services were rendered by KPENV to other group companies also and quantum of benefit vis a vis the service is not proved by the assessee. 4.4.We find that the assessee had also proved the benefits derived by way of increase in turnover from the years ended 31.3.2005 onwards pursuant to the MSSA. It is reiterated that MSSA was entered into on 22.10.2004 and the following table would prove the benefit derived by way of increase in turnover in figures as well as in percentage prior to rendering of management support services and thereafter :- Sr. No. Year Ended Sales (Rs. Crores) % increase (taking year 200-01) as the base year Remarks 1 March 2001 15313 - No Management support services received during this....
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.... 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the Transfer Pricing Officer stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the Transfer Pricing Officer. ...... ....... .... . 36. In this case, the issue is whether an independent entity would have paid for such services. Importantly, in reaching this conclusion, neither the Revenue, nor this Court, must question the commercial wisdom of the assessee, or replace its own assessment of the commercial viability of the transaction. The services rendered by CWS and CWHK in this case concern liaising and client interaction with IBM on behalf of the assesseeactivities for which, according to the assessee's claim-interaction with IBM's regional offices in Singapore and the United States was necessary. These services cannot - as the Income-tax Appellate Tribunal correctly surmised-be duplicated in India insofar as they require interaction abroad. Whether it is commercially prudent or not to employ outsiders to conduct this activity is a matte....
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.... services rendered. To this extent the above observations of the Hon'ble High Court may not be relevant to the present case. 28. The following aspects would require consideration in order to identify intragroup services requiring arm's length remuneration: - Whether services were received from related party. - Nature of services including quantum of services received by the related party. - Services were provided in order to meet specific need of recipient of the services. - The economic and commercial benefits derived by the recipient of intragroup services. - In comparable circumstances an independent enterprise would be willing to pay the price for such services? - An independent third party would be willing and able to provide such services? Whether payment made to AE meets ALP criterion will be determined, keeping in mind all the above factors, as well. 29. Keeping in mind the principles emanating from the aforesaid decisions, we shall now proceed to examine the material on record to see the nature of services received by the Assessee and as to whether the same were at Arm's Length. ....
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....on for AY 2011-12 the assessee received IT services from its AEs. The services were received by the assessee in pursuance to Service Level Agreements (SLA for short) entered into by the assessee with its AE. The assessee paid cost plus 5% to its AE for receipt of such services. The IT services provided by AE were integral to the business of the assessee. The services were received based on SLA entered into by the assessee with it AE. The services were effective from January 1, 2006, the SLAs were bifurcated in 5 separate agreements: * Code Desktop Client Service - it supports Philips desktop infrastructure and covers all the activities to create and maintain upto date Code Desktop Client. This service is divided into four categories - Hardware, Software, Scripting and Support (Refer page 55-57 of Volume 1 part-1-DRP submission). * System Management Infrastructure - System Management Infrastructure is Philips application for systems management of Wintel Clients and servers residing in EMI forests. It provides number of system management functions such s inventory, software distribution, reporting & remote assistance for Wintel clients & services. (refer page 57-58 ....
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.... the independent comparables selected for management support services was 8.27% with updated margin of 8.53% only. The assessee further submitted that the IT services received from the AE have resulted in significant benefit to it, without which the assessee would not have been able to function efficiently. Moreover, had the assessee not received these services from its AE, it would have procured the same from third parties, which would have resulted in incurring more expenditure for IT services. The assessee benefitted from economics of scale as the services like licenses; applications etc. which were procured by the AE from third parties were taken for the whole Group which have resulted in lower price to the AE. Further, in 21st century technology plays a key role in the functioning of any enterprise more so a global enterprise like Philips. The assessee being part of the Philips group has to use the same licenses and applications which are used by all the group companies worldwide to be in sync with the group and also to get the benefit of economics of scale. Further, the assessee did not have resources and expertise to develop he applications on its own which are require....
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....udgment of Hon'ble Supreme Court in the case of Radhasaomi Satsang vs CIT reported in (1992) 193 ITR 321 (SC) . 3. The ld. AR drew our attention on pages 413 to 419 where details of IT services received by the assessee and its corresponding benefit to the assessee are placed. 4. The ld. AR reiterated the submissions as made before the lower authorities. On the other hand, Ld. DR submitted that no benefit test has been conducted during the assessment proceedings. There has to be a co-relation between the IT service agreement and benefit derived by the assessee from IT services. The ld. DR vehemently supported the order of lower authorities. 15. We have heard the rival contentions & perused the materials available on record. In this regard we find that the ld. DRP has deleted the addition made by the TPO in own cases of the assessee pertaining to other assessment years as discussed above. Thus, the assessee has been claiming the IT expenses for the last several years and the same was not denied and therefore in our view principle of consistency should be applied in the instant case. In this connection we are relying on the decision of Hon'ble Supreme Cou....
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....ices rendered by it. 17. The assessee during year from its PSC division had provided software development services to its AE. The assessee provided services based on a SLA with KEPENV and charged a markup of 10% on costs for the services provided. The assessee based on the FAR analysis of PSC division selected the Transaction Net Margin Method (TNMM) as the most appropriate method for determining the ALP of software development services. The assessee selected operating margin on operating costs as an appropriate Profit Level Indictor (PLI). The assessee conducted comparable search in two publicly available databases i.e PROWESS and Capitaline Plus and selected nine companies as comparables. The assessee earned an operating margin on operating cost of 9.02% compared to comparables of three year weighted average margin on operating cost i.e. OP/OC of 0.52% and accordingly, it was justified that the transaction of the assessee pertaining to rendering of software development services to its AE was at arm's length. The assessee has maintained and filed a bona fide TP documentation as prescribed in Rule 10D of the Income Tax Rules, 1962 in support of his claim. The assessee selecte....
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....sp; Maximum 21.09% Minimum -63.68% Lower IQ 0.37% Upper IQ 14.69% NC-Not comparable Note: * Segment Data considered The assessee also provided working for working capital and risk adjustments. The assessee also submitted that the Hon'ble DRP Kolkata in its own case for AY 2010-11 has allowed working capital and risk adjustments of 2% each, thus following rule of consistency the same should be allowed as the facts remain same and there has been no change in the business. How....
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....ation, provider of solutions to network equipment manufacturers, IIT/ITES service provider etc. these comparables should not be considered for comparability analysis. * Comparables having significant intangibles and research & development activity (such as Sasken, Tata Elxsi and Infosys) - the assessee is a captive service provider. It does not have any intellectual property or intangibles. Hence comparables with significant R&D expenditure and intangibles should not be considered as comparable to the assessee. Detailed submission on each of these companies is provided in Exhibit 6, to this submission. Company Name 2009 2010 2011 Three years weighted average operating margin on operating costs Bells Softech Ltd 12.97% -16.32% -16.95% 1.11% CGVAK Software & Export Ltd (Seg) 5.47% -9.96% 4.98% 0.37% Evoke Technologies Ltd 19.93% 18.29% 8.11% 14.69% I Power Solution India Ltd 1.21% 4.73% 2.86% 2.67% Kaashyap Technologies Ltd -3.95% 6.45% 5.36% 1.62% Melstar Information Technologies Ltd -7.60% NC 3.44% -1.52% Persistent Systems Ltd.# 11.76% 24.69% 20.46....
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....bove the above the ld. DRP also directed to make the adjustments for the working capital adjustments in respect of certain companies. Being aggrieved by the order of ld. DRP, both assessee & Revenue came in 2nd appeal before us. The grievances of the assessee are two folds. (1) The learned DRP erred in accepting certain companies as recommended by the TPO for the purpose of comparables. (2) The TPO failed to provide working capital adjustments as directed by the learned DRP. On the other hand the grievances of the Revenue are also two folds. (1) The ld. DRP erred in directing to include certain companies for the purpose of comparables. (2) The ld. DRP erred in admitting the fresh companies for the purpose of comparables. First we take up assessee appeal ITA No. 539/Kol/2016 The ld. AR before us submitted that the following companies cannot be selected for the purpose of comparable. 1. E- Infochips Ltd. (a) Functionally not comparable - E-Infochips is engaged in diversified activities as it has income from software development, hardware maintenance, and IT consultancy. Further the Annual Report (AR) mentions that the company is engaged in so....
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.... different in nature from IT services. The company derives income from both software services & products. (b) Segmental information not available - P&L shows income from "sale of software services & Products. However, no break-u available in respect of the same. There is no segmental information available in their annual report. (c) Owns intangibles- The company also owns intangibles. (d) Engaged in R&D activity - The company also undertakes R&D activity. (e) Acquisitions during the year: Persistent has also undertaken acquisitions during the year Separate charts to be seen for detailed arguments & case laws. Similarly the ld. AR submitted that correct margin was not computed in case of Persistent Systems & Solutions Limited. The ld. AR also submitted that the working capital adjustments should be given by the TPO as directed by the learned DRP. The learned AR in support of his claim also submitted that the Hon'ble ITAT in the own case of the assessee in ITA 1068/Kol/2015 for the assessment year 2006-07 has allowed working capital adjustments by 2%. The ld. AR also submitted that the variation of 5% from the arithmetic mean should be all....
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....tivities consisting of business analytics & Intelligence (BPO activities),web development, trading of computer software etc. (b) Segmental not available - The company does not have segmental information in their annual report in relation to its diversified activities. (c) Related party transactions - The company has RPT of 22.06% during the year. (d) Acquisition during the year - During the year, the company has undertaken merger of its subsidiary "Axiom" with itself. Separate charges to be seen for detailed arguments & case laws. 3. Larsen & Toubro Infotech Ltd. (L&T):- The Hon'ble DRP in their directions had rightly rejected L&T by stating that it has intangibles for its propriety products & services etc. Accordingly, the contentions of the assessee against L&T is reproduced as under:- (a) Functionally not comparable - Larsen & Toubro Infotech is not functionally comparable as it is engage in both software services and software products. (b) Segmental information not available - The company does not have segmental information in their AR (c) Owns Intangibles - the company owns intangibles for its proprietary produ....
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....ed intellectual properties. The ld. AR also submitted the details of the companies which have been accepted by the ld. DRP for the purpose of comparables. The details stands as under:- 6. Bells Softech Ltd. (Bells Softech):- The Hon'ble DRP in their directions had rightly accepted Bells Softech by stating that the company is functionally comparable. Accordingly, the submissions of the assessee with respect to Bells Softech is reproduced as under:- (a) Functionally comparable:- Bells Softech is functionally comparable as it is engaged in the provision of software solution service and it derives its revenue from software development services. 7. CG Vak Softwre & Export Ltd (Seg) ("CG Vak"):- The Hon'ble DRP in their directions had rightly accepted CG-Vak by stating that the comparable is engaged mainly into software development. TNMM is a more tolerant method. Enterprises may have a wide range of GP margins but still earn broadly similar level of profits, hence accepted. Accordingly, the submissions of the assessee with respect to CG- Vak is reproduced as under:- (a) Functionally comparable -CG Vak is functionally comparable as it ....
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....s, hence accepted. (a) Functionally comparable:- Melstar is functionally comparable as it is engaged in providing software services. (b) Accepted by DRP in AY 2009-10:- The company was also accepted by the DRP in AY 22009-10. The ld. AR also submitted that no fresh list of companies has been submitted before the learned DRP for the purpose of comparables. The ld. AR vehemently supported the order of ld. DRP. 20. We have heard the rival submissions and perused the materials available on record. There is no dispute on the application of TNMM as the MAM with PLI OP / OC except in one company i.e. Persistent system & solutions limited. As per the assessee it should be 16% and the same should be at 13.63% after working capital adjustment. The necessary working as made by the assessee is placed on page 481 of the PB which reads as under: Persistent Systems & Solutions Ltd - Computation of Net Cost Profit margin Particulars Amount (in Rs) Page Revenues 189,490,457.00 Pg 53 AR 2011 Operating income 189,490,457.00 Personnel expenses Operating & Other expenses 150,781,722.00 Pg 53 AR 2011 De....
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.... TPO is directed to follow the direction of the ld. DRP for providing adjustment for working capital. 21.3 We also observe that the assessee is getting the relief on the selection of comparable companies. Therefore we are not inclined to adjudicate the issue of the assessee for claiming the benefit of variation of 5% from the arithmetic mean and the same becomes infructuous. Thus the grounds of appeal of the Revenue are dismissed and the grounds of appeal of the assessee are allowed. 22. Next inter-related issue raised by assessee in ground No.7 to 7.3 is that Ld. DRP erred in allowing depreciation on moulds @ 15% though it is eligible for depreciation @ 30%. 23. The AO during the course of assessment proceedings observed that assessee has claimed depreciation @ 30% on moulds instead of 15%. The AO further observed that the assessee is engaged in business of manufacturing, selling and trading of electronics and electrical products, electronic medical equipments and development of software services. Therefore, the assessee is entitled to claim depreciation @ 15% on moulds. 24. The depreciation on moulds 30% is available to the assessee if these are used exclusively in ru....
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....ories. However, the amount of depreciation claimed by the assessee on moulds was disallowed by the assessee on the ground that higher rate of depreciation on moulds is available only if these are used in the plastic factory. The view taken by the AO was subsequently confirmed by the Ld. DRP. Now the issue before us arose whether assessee is eligible for depreciation on moulds at higher rate in the given facts and circumstances. It is undisputed fact that assessee has been claiming depreciation on moulds @ 30% in all the earlier years which was granted by the Revenue and no dispute with regard to rate of depreciation arose in the earlier years despite the fact that the assessments for earlier years were framed u/s 143(3) of the Act. In this regard we observe that the assessee was allowed depreciation at higher rate in all the earlier years and no disallowance was made on account of this. However we note that similar disallowance was also made by the ld. DRP for the AY 2012-13 & 2013-14. The ld. AR before us has also not brought anything on record evidencing that the assessee had plastic factory. The ld. AR has just verbally submitted that in most of the products which are manufactur....
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....see is that the surcharge on DDT should have been levied @ 5% only. On perusal of records, we find that the surcharge applicable for the AY 2011-12 is 7.5%. But it is undisputed fact that dividend was declared and distributed and paid in AY 2012-13 and therefore the surcharge as applicable to the AY 2012-13 i.e. @ 5% should be applied on the DDT. In view of above, we direct the AO to delete the extra surcharge levied on the DDT. Consequently, ground raised by assessee is allowed. 36. In the result, assessee's appeal is allowed for statistical purpose. Coming to Revenue Appeal 863/Kol/2016 37. Revenue's raised the following grounds:- "1. Whether on the fact and in the circumstances of the instant case, the Ld. DRP has erred in directing exclusion to revise AMP adjustment following Delhi High Court order in the case of Sony Ericsson case, when the Delhi High Court is not a jurisdictional High Court in this instant case. 2. Whether on the facts and in the circumstances of the instant case, the Ld. DRP's direction on the issue of AMP adjustment, is within its jurisdiction since it tantamount to fresh Transfer pricing proceedings, akin to set aside of assessme....
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....xpenditure in earlier years and the TPO accepted the same. The assessee before TPO during the course of Transfer Pricing Proceedings also made detailed submissions in respect of AMP expenses as detailed under :- * AMP expenses incurred by the assessee were in respect of its own business requirements /considerations / purposes and was not rendered on behalf of the AE; * AMP expense does not constitute an international transaction * The AMP expenses are already factored in TNMM in the distribution segments and hence the same are not required to be evaluated separately; * The business and pricing model of the assessee in relation to its distribution activities should be evaluated before concluding applicability of the Special Bench Ruling of LG Electronics; * Where the Indian entity has been adequately and properly compensated for incurring such expenditure; no separate TP adjustment is warranted; * Application of Bright Line Test (BLT) is not in consonance with Indian Transfer Pricing Regulations; * Without prejudice to the above, even if BLT is applied a proper comparable set is important to establish the BLT. H....
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....ce it does not even meet the criteria laid down under section 92F(v), which defines the term 'transaction". Apart from the above, it is submitted that the AMP expenses cannot be considered as "international transactions". In this regard, Section 92(1) of the Act provides the following: "An income arising from an international transaction shall be computed having regard to the arm's length price." [emphasis supplied] As per the above, the primary section i.e. Section 92(1) of the Act limits arm's length analysis to "international transactions. Further, Section 92(B)(1) of the Act defines the term "international transaction" in the following manner: "For the purpose of this section and section 92,92D and 92E, "international transactions" means a transaction between two or more associated enterprises either or both of whom are non-residents, in the nature of ...... " Section 92B(1) defines the term "international transaction" to mean transaction(s) between "associated enterprises". In this regard it is noted that section 92B(2) of the Act, extends the scope of Section 92B(1) by introducing a deeming fiction with regard to international tran....
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....n agreement with the view of CIT(A) that provisions of section 92 are not applicable for the allowability of this expenditure. The expenditure incurred by the assessee company on advertisement / sales promotion of some Nestle products in India may give rise to certain benefit to Nestle SA, but this cannot be a ground to disallow the claim of the assessee, once it is established that the expenditure in question has been incurred by the assessee for the purpose of business of the assessee inasmuch as the expenditure by the assessee on advertisement / sales promotion has direct nexus with the earning of income by the assessee." In Nestle's case the Hon'ble ITAT has held that AMP expense incurred by the assessee for promotion of its own products in its own territory, albeit carrying the brand name of an AE, is not amenable to the provisions of section 92 and has also not in violation of the requirements of section 37(1) of the Act. In light of the above compelling arguments, facts and available judicial precedence, it is hereby submitted that holding the excessive AMP expenses as international transactions is not in consonance with the Indian transfer pricing regulation and is b....
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....actor in the "marketing function" and brand value creation done by the Indian distributors on behalf of its Associated Enterprise (AE), who is the brand owner, as an alternative to applying the bright line test. The facts and observations of the case are discussed below: Facts Of The Case. * The taxpayer is a part of Luxottica group which is in the business of design, manufacture and distribution of sunglasses and prescription frames in mid and premium price, categories. * The taxpayer is engaged in trading and distribution of the group products in India. * For the Assessment Year (AY) 2012-13, with respect to the international transaction pertaining to its trading activity, that is, import of finished goods, the taxpayer has applied Resale Price Method (RPM) for benchmarking purposes. Notably, the taxpayer has incurred a significant AMP expenditure in proportion to its sales revenue. * The Transfer Pricing Officer (TPO) evaluated the significant AMP expenditure incurred by the taxpayer and opined that the excessive promotional efforts or expenditure incurred by the taxpayer was in essence a 'marketing function' carried out by th....
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.... other hand the ld. AR reiterated the submissions as made before the ld. DRP. Both the parties relied in the order of authorities below as favourable to them. 43. We have heard the rival submissions and perused the materials available on record. The primary issue here arises whether the AMP expenses constitute the international transactions so as to attract the provisions of transfer pricing of the Income Tax Act. The claim of the ld. AR is that the AMP transaction does not represent the international transaction between the AE's therefore no question of determining the ALP of AMP transactions. We find force in the argument of the ld. AR in the given facts & circumstances. Therefore, in our considered view the AMP cannot be regarded as international transaction. In holding so we find the support & guidance from the judgment of Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited Vs. CIT reported in 381 ITR 117 wherein it was held as under : "51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure ....
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....produced hereunder:- "6.2. We have heard the rival submissions. We find that the issu9e under dispute is covered by the decision of the Hon'ble Supreme Court in the case of ICDS Ltd supra in favour of the assessee. Hence respectfully following the same, we allow the ground No.6 raised by the assessee." Respectfully following the same, we confirm the order of Ld. DRP and Revenue's ground is dismissed. 51. Last issue raised by Revenue in ground No.8 is that Ld. DRP erred in deleting the addition made by the AO for Rs.2,23,60,000/- on account of waiver of loan. 52. The assessee, during the year has credited its profit and loss account on account of waiver of loan for Rs.2,23,68,000/-. The assessee in computation of income has reduced the amount of loan waived from its total income on the ground that it is not taxable. However, AO was of the view that the impugned amount falls within the provision of clause (iv) of Section 28 of the Act and therefore it is liable to be taxed and accordingly, AO added the same to the total income of assessee. 53. Aggrieved, assessee preferred an appeal before Ld. DRP who deleted the addition made by AO. The Revenue, being aggrie....