TaxTMI 
TaxTMI 
2018 (2) TMI 1084
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....ugned order of assessment framed by the learned Deputy Commissioner of Income-tax, Circle 18(1), New Delhi (hereinafter referred to as 'the learned AO') pursuant to the directions of the Hon'ble Dispute Resolution Panel - II (hereinafter referred to as 'the Hon'ble DRP') under section 143(3) read with section 144C of the Income-tax Act, 1961 ('Act'), is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab-initio. 2. That, without prejudice, the learned AO has grossly erred in making a transfer pricing addition of Rs. 277,999,266/- and a corporate tax addition of Rs. 14,857,889 while computing the income of the Appellant. The addition made to the returned income is highly unjustified and also suffers from mistakes apparent from record. 3. That the Hon'ble DRP has committed gross errors in confirming the order passed u/s 92CA(3) of the Act by the learned Transfer Pricing officer (the learned TPO') proposing a transfer pricing adjustment to the actual value of the international transactions of the Appellant with its associated enterpri....
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....ellant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP of the Appellant's international transactions and holding that the international transactions are not at arm's length. 10.1 That on the facts and circumstances of the case and in law, the learned TPO / Hon'ble DRP has erred in rejecting the Appellant's claim to use multiple year data for computing the arm's length price and, instead, has adhered to the use of single year updated data to conclude the ALP of the international transactions. 10.2 Even as otherwise, on the assumption adopted by the learned TPO and without prejudice to Ground 10.1 above, even if single year updated data of the comparables selected in the transfer pricing documentation is considered, then also no transfer pricing adjustment could have been made to the income of the Appellant. 10.3 That on the facts and the circumstances of the case and in law, the learned TPO/ Hon'ble DRP has erred in selection of functional non comparable companies and application of arbitrary filters for the purpose of determination of arm....
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....14 sought to set aside the impugned order dated 20.12.2013, passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short 'the Act') qua the assessment year 2009-10 on the grounds inter alia that :- "i. That the Ld. DRP-II erred in law and facts in allowing part relief of Rs. 4,24,45,874/- to the assessee in the computation of Arm Length Prices of the International Transactions pertaining to the "Provision of ITES" and "Software Development Services". ii. That the Ld. DRP-II erred in law and facts in accepting the contention of the assessee regarding exclusion of M/s. Aricent Tech., M/s. Bodhtree Consulting and M/s. Cat Technologies (Provision for Software Development Services) without appreciating the reasons given by TPO and without considering that the TPO had selected the comparables keeping in view the broad comparability under TNMM. iii. That the Ld. DRP-II erred in law and facts in accepting the contention of the assessee regarding exclusion of M/s Coral Hub (Provision tor ITES) without appreciating the reasons given by TPO and without considering that th....
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.... expatriate's salaries - 6,627,466 Reimbursement of expenses received by UHG India - 5,636,108 Advance against expenses - 12,326,620 Grant of RSU/SAR - Nil 5. The taxpayer has two segments concerning international transactions viz. Information Technology Enabled Services (ITES) and Software Development services. The taxpayer in its Transfer Pricing Study used Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) for both the segments and computed its margin at 13.83% and 13.23% in ITES and Software Development services respectively. 6. Ld. Transfer Pricing Officer (TPO), after examining the TP study made by the taxpayer and on the basis of various filters, described in para 3.2 of the TP order made its own TP analysis by selecting 8 comparables for ITES segment and 18 comparables in software development segment and calculated their margin at 34.29% and 28.88% respectively and computed the cumulative adjustment in both the segments to the tune of Rs. 32,04,45,140. 7. Ld. DRP who has given part relief by excluding Bodhtree Consulting, CAT Technologies and Aricent Technologies from the final set of comparables qua software de....
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....5 7. Fortune lnfotech Ltd. 6.27 Average 33.90 The computation of adjustment amount based on the above arm's length margin is as follows: Operating Cost(A) 86,20,69,892 OP/TC 33.90% Margin (B) 29,22,41,693 Arm's Length Price(A+B)=C 1,15,43,11,585 Price Charged by the assessee(D) 98,13,18,815 Difference (C-D) 17,29,92,770 % of difference with ALP 14.98% Adjustment proposed 17,29,92,770 Based on this analysis, adjustment amount Rs. 17,29,92,770 is proposed for ITES Segment. Total Adjustment Amount : Rs. 27,79,99,266" TRANSFER PRICING ISSUES 10. Undisputedly, there is no dispute as to the TNMM used by the taxpayer as MAM for benchmarking the international transactions. It is also not in dispute that the taxpayer is a captive service provider to its AE to provide software development services and ITES services. There is also no change in the business model of the taxpayer as compared to the preceding years. 11. The ld. AR for the taxpayer to cut short the controversy sought exclusion of 5 comparables, viz., Infosys Technologies Ltd., Persistent Systems Ltd., Tata Co....
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....dium, also shows that Infosys is a giant company having gross profit of Rs. 9119 crores. 17. On the other hand, the ld. Taxpayer is providing services on cost plus basis having minimum risk and having no intangibles. Infosys has been ordered to be excluded as a comparable by Hon'ble Delhi High Court in case of Agnity India Technologies Pvt. Ltd. - (2013) 219 taxman 26 (Del.) being a giant company having huge intangibles and incurring substantive amount on R&D and is a full-fledged risk taking company. More so, Infosys was ordered to be excluded in taxpayer's own case for AY 2008-09 (supra). In these circumstances, Infosys is not a suitable comparable vis-à-vis the taxpayer for benchmarking the international transactions, hence we order to exclude it. PERSISTENT SYSTEMS LTD. (PERSISTENT) 18. The taxpayer sought exclusion of Persistent on the grounds inter alia that it is outsourcing its services; that it is also engaged in development of products with no segmental data available; and that it is expending around 1% of its total income of Rs. 56.1 million on R&D activities. Undisputedly, Persistent has not been contested by the taxpayer before ld. TPO as well as ld. DR....
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....are licence at Rs. 668.25 crores. Tata has also expended Rs. 42.31 crores on its R&D and a highly risk bearing company and as such, cannot be a suitable comparable vis-à-vis taxpayer which is a captive software provider being remunerated on cost plus mark up basis for rendering services to its AE. So, we order to exclude Tata from the final set of comparables. THIRDWARE SOLUTIONS LTD. (THIRDWARE) 22. The taxpayer sought exclusion of Thirdware on ground of functional dis-similarity on the ground that its segmental information is not available and that company is also into sale of user licence for software application and relied upon SunLife India Services Centre Pvt. Ltd. in ITA No.1489/Del/2014 for AY 2009- 10 & St. Ericsson India (P.) Ltd. vs. Addl. CIT in ITA No.1672/Del/2014 for AY 2009-10. 23. However, the ld. DR for the Revenue opposed the exclusion of Thirdware on the ground that the taxpayer has not contested Thirdware either before the ld. TPO or before ld. DRP. 24. The coordinate Bench of the Tribunal in case of St. Ericsson India (P.) Ltd. (supra) while examining the comparability of Thirdware ordered to exclude Thirdware as a comparable vis-à-vi....
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....Director's Report, specific area in which R&D is being carried out by the Wipro is as under :- "Wipro's R&D focus is to strengthen the portfolio of Centres of Excellence (CoE), Solution Acceleration and Software Engineering Tools & Methodologies. In financial year 2008-09, your Company incubated Applied Research group to investigate & analyze potential impact and business prospect of technologies which are in the early stage of adoption." 29. Moreover, Wipro is having huge intangibles as is evident from consolidated balance sheet schedule V, available at page 1659 of the annual report compendium, to the tune of Rs. 28213 million. 30. So keeping in view the functions, assets and risk profile of Wipro and which is a fully risk bearing company, we are of the considered view that it is not a suitable comparable vis-à-vis the taxpayer which is a routine captive software development service provider working on cost plus mark up model of business. Applying the ratio of the decision rendered by Hon'ble High Court in Agnity India Technologies Pvt. Ltd. (supra), we are of the considered view that Wipro being a giant company in the area of development of software assumin....
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.... Out of aforesaid 8 comparables for benchmarking the international transactions qua ITES services, the taxpayer has sought exclusion of Accenture Technologies Ltd., Cosmic Global Ltd. & Eclerx Services Ltd. The taxpayer has also sought inclusion of Microland Ltd., R Systems & CG Vak Software & Exports Ltd.. 35. Now, we would examine the comparability of the aforesaid companies vis-à-vis the taxpayer one by one. COMPANIES SOUGHT TO BE EXCLUDED BY THE TAXPAYER ACCENTURE TECHNOLOGIES LTD. (ACCENTURE) 36. The taxpayer sought to exclude Accenture on grounds of its functional dis-similarity; that Accenture has undergone extra ordinary events during the year under assessment and that its segmental data is not available in the public domain and relied upon the taxpayer's own case in ITA No.1038/Del/2015 for AY 2010-11, Ameriprise India Pvt. Ltd. vs. ACIT in ITA No.2010/Del/2014 for AY 2009-10, Capital IQ Information Systems vs. ACIT in ITA No.124/Hyd/2014 for AY 2009-10 and Macquarie Global Services Pvt. Ltd. vs. DCIT in ITA No.6803/Del/2013 for AY 2009-10. 37. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the AO/DRP. 38. Th....
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....d Macquarie Global Services Pvt. Ltd. vs. DCIT in ITA No.6803/Del/2013 for AY 2009-10. 43. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the AO/DRP. 44. Bare perusal of the balance sheet and profit & loss account of Cosmic, available at pages 701 & 702 of the annual report compendium, shows that financial results are available only on entity level. When we examine Schedule VIII to the profit & loss account showing revenue from operation, it is clear that income from medical transcription and consultancy which is akin to taxpayer is only Rs. 9,90,737/- whereas the major chunk of the business are from translation charges i.e. Rs. 6,99,35,756/- and income from BPO is Rs. 27,76,090/-. 45. Moreover, perusal of the P&L account further shows that the taxpayer has outsourced 56% of its activities and its outsourcing expenses are 56% of its revenue which makes its business model different from the taxpayer. So, we can safely conclude that Cosmic is into translation business which is not comparable to the taxpayer which is providing insurance claim processing services to its AE under ITES segment. 46. Cosmic was examined as a comparable in ta....
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....xpayer is also a KPO, is not acceptable. E-Clerx has been excluded as a comparable in taxpayer's own case for AY 2008-09 by the coordinate Bench of the Tribunal in ITA No.6312/Del/2012 order dated 28.08.2014 and since then there is no change in the business profile of the taxpayer till today. 50. E-Clerx was also ordered to be excluded as a comparable in Macquaire Global Services Pvt. Ltd. (supra) which was also into providing ITES services to its AE on the ground that E-Clerx is a KPO and is providing end to end support through trade life-cycle including trade confirmation including settlement etc. and cannot be compared with Macquaire Global Services Pvt. Ltd. (supra) which is also a captive unit rendering services to its AE without any intangibles. 51. So, in view of the matter, we are of the considered view that E-Clerx is not a suitable comparable vis-à-vis the taxpayer who is ordered to be excluded. COMPARABLES SOUGHT TO BE INCLUDED BY THE TAXPAYER MICROLAND LIMITED (MICROLAND) 52. Undisputedly, Microland was taken as a comparable first time by the taxpayer before the ld. DRP. The ld. AR for the taxpayer submitted that Microland passes all the filters ap....
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....relying upon "Safe Harbour Rule" as per CBDT Notification dated 18.09.2013 upheld the findings returned by ld. TPO that foreign exchange gain/loss is a non-operating item while determining the arm's length price of international transaction. 57. However, the ld. AR for the taxpayer contended that the taxpayer being a captive service provider passes the foreign exchange loss/gain to the respective AE on case to case basis without any mark up in order to make suitable compensation of the margin earned by the taxpayer vis-à-vis comparable companies. 58. Undisputedly, the Revenue has not treated foreign exchange gain/loss as non-operating item while operating arm's length price of international transaction of the taxpayer in AYs 2008-09 and 2010-11. 59. Hon'ble High Court of Delhi in case cited as Pr. CIT-02 VS. M/s. Cashedge India Pvt. Ltd. in ITA 279/2016 order dated 04.05.2016 while upholding the decision rendered by the Tribunal held that Safe Harbour Rule is not applicable to AY 2008-09 as it came into force w.e.f. 18.09.2013 since the ld. DRP has primarily relied upon Safe Harbour Rule while upholding the decision of ld. DRP in treating the foreign exchange fluctu....
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....;Assembly' done by the assessee under this segment is not possible without purchases and forex gain is in relation to such purchase transactions, we have no hesitation in holding that it is an item of operating cost." 16 We find that the aforesaid basis that foreign exchange gain/loss should be treated as nonoperating item is based on the notification of CBDT issued on 18.9.2018 on safe harbour. However, such a contention has been rejected in the aforesaid order of the coordinate bench wherein it was held as under: "4.8. The ld. AR relied on Rule 10T(j) to contend that loss arising on account of foreign currency fluctuations cannot be included in the operating expense. We are not persuaded to give any mileage to the ld. AR on this count for the simple reason that Rule 10T is a part of Safe harbor rules notified on 18.09.2013 which are not applicable to the assessment year under consideration." 61. So, we are of the considered view that foreign exchange gain/loss cannot be treated as non-operating items while calculating the margin of the taxpayer as well as comparables. So, we direct to treat the foreign exchange gain/loss as non-operating margin as non-operating items while....
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....bles throughout the year on daily basis. If the contention of the ld. DRP is taken to a logical conclusion, then there can never be a working capital adjustment, because in no case, the daily figures of comparables would come to the fore. Since, the authorities below have denied working capital adjustment to the assessee on flimsy ground, we vacate their action and hold in principle that the grant of working capital adjustment, if otherwise available, cannot be jeopardized. However, as regards the quantum of working capital adjustment, we direct the AO/TPO to vet the correctness of the amount of working capital adjustment claimed by the assessee and then decide its allowability as per law." 64. Following the decision rendered by the coordinate Bench of the Tribunal, we are of the considered view that the taxpayer is entitled for working capital adjustment to be on the same page with the comparables. So, the taxpayer is entitled for working capital adjustment, the quantum of which is to be checked by the ld. TPO who has to proceed on the lines of the decision rendered by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2008-09, Consequently, Ground No.5 is deter....
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....of the industrial undertaking was eligible for exemption within the meaning of Section 10B and applied the formula under Section 10B(4) of the Act for determining the profits from exports. The Assessee's contention that the expression "profits of the business of the undertaking" in Section 10B(4) was wider than the expression "profits and gains derived by" the Assessee from a 100% EOU occurring in Section 10B(1) was accepted by the ITAT. The ITAT noticed that unlike Section 80HHC, where there was an express exclusion of the interest earned from the 'profits of business of undertaking', there was no similar provision as far as Sections 10A and 10B were concerned. 10. In Motorola India Electronics (P.) Ltd. (supra) reference was made to the decision of the Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539 which dealt with Section 80HH and Liberty India v. CIT [2009] 317 ITR 218/183 Taxman 349 (SC), which interpreted Section 801B of the Act. Reference was also made to the decision of CIT v. Sterling Foods [1999] 237 ITR 579/104 Taxman 204 (SC), which interpreted Section 80HH and the decision of the Madras High Court in CIT v. Menon I....
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....g, there is no further mandate in the provisions of section 10B to exclude the same from the eligible profits. The mode of determining the eligible deduction u/s 10B is similar to the provisions of section 80HHC inasmuch as both the sections mandates determination of eligible profits as per the formula contained therein. The only difference is that section 80HHC contains a further mandate in terms of Explanation (baa) for exclusion of certain income from the "profits of the business" which is, however, conspicuous by its absence in section 10B. On the basis of the aforesaid distinction, sub-section (4) of section 10A/10B of the Act is a complete code providing the mechanism for computing the "profits of the business" eligible for deduction u/s 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act. As per the computation made by the Assessing Officer himself, there is no dispute that both these incomes have been treated by the Assessing Officer as business income. The CBDT Circular No. 564 dated 5th July, 1990 ....
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.... on the FDRs could form part of the 'profits of the business of the undertaking'. The attention of the Court has been drawn to the decision of the Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (2014) 46 Taxmann.com 167 (Kar.) which held that there was a direct nexus between the interest received from the FDRs created by a similarly placed Assessee from the amounts borrowed by it. The High Court approved the order of the ITAT in that case which held that the entire profits of the business of the undertaking should be taken into consideration while computing the eligible deduction under Section 10B of the Act by ITA 392/2015 applying the mandatory formula. 10. In the present case, the Assessee has stated that the interest on FDRs was received on "margin kept in the bank for utilization of letter of credit and bank guarantee limits". In those circumstances, the decision of the ITAT that such interest bears the requisite characteristic of business income and has nexus to the business activities of the Assessee cannot be faulted. In other words, interest earned on the FDRs would form part of the "profits of the business of the undertaking" for the ....
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....ions as well as the impugned order of the ITAT in the present case and perhaps he would advise it to do so hereafter. He has also handed over a written note of submissions, reiterating the above submissions. 15. In the considered view of the Court, the submissions made on behalf of the Revenue proceed on the basic misconception regarding the true purport of the provisions of Chapter VIA of the Act and on an incorrect understanding of Section 80A(4) of the Act. The opening words of Section 80A(4) read "Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter . . . . . ". What is sought to be underscored, therefore, is that Section 80A, and the other provisions in Chapter VIA, are independent of Sections 10A and 10B of the Act. It appears that the object of Section 80A(4) was to ensure that a unit which has availed of the benefit under Section 10B will not be allowed to further claim relief under Section 80IA or 80IB read with Section 80A(4). The intention does not appear to be to deny relief under Section 10B(1) read with Section 10B(4) or to whittle down the ambit of those provisio....
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.... placed before the AO] which clearly states that "fixed deposit receipts (including accrued interest) valuing Rs. 15,05,875 are under lien with Bank of India for facilitating the letter of credit and bank guarantee facilities." In terms of the ratio of the decisions of this Court both in Hritnik Exports (P.) Ltd. (supra) and Universal Precision Screws (supra), the interest earned on such FDR ought to qualify for deduction under Section 10B of the Act." 68. So, following the findings returned by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2010-11 based on the decision of Hon'ble High Court in Riviera Home Furnishing (supra), we are of the considered view that the taxpayer is entitled for deduction u/s 10A on the interest earned on fixed deposit receipts to the tune of Rs. 125,71,932/- and Rs. 22,85,957/-. 69. Similar view as to allowing the deduction u/s 10A of the Act on excess provision returned back amounting to Rs. 7,42,769/- has been expressed by the coordinate Bench of the Tribunal in Birlasoft (India) Ltd. vs. DCIT 44 SOT 664 (Delhi). Following the decision rendered by the coordinate Bench of the Tribunal, we are of the considered view that notice....
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....So, we are of the considered view that there is no scope for further deliberations on the comparability of Aricent as it fails RPT filter applied by the TPO himself. So, ld. DRP has rightly rejected Aricent as a comparable vis-à-vis taxpayer. BODHTREE CONSULTING (BODHTREE) 77. Before the ld. TPO, the taxpayer sought to reject Bodhtree on the grounds inter alia that it has only ONE segment i.e. software development in FY 2006-07 being engaged in providing open and end to end web solutions, software consultancy, design and development of solutions, using the latest technologies and besides specialized IT and data management services, the company had developed and spun off its strategic business units in e-publishing (e-paper solution), E-Learning (Web based assessment services ) and Mobile Classified space (mobile search and classified advertising platform for the used car industry in Malaysia) into Pressmart Media Limited, Learn Smart (India) Pvt. Ltd. and Trylah SDN Bhd respectively. It is also mentioned that the company has software solutions of its own (Hygia 2.3 - Enterprise Data Quality Solution, Busin Essence 4.0 - Business Intelligence Dashboard Solution, DigiDoc....
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....in which the expenses incurred in respect of such software development may be capitalized, which appears to be a more rational manner of depicting the true and fair view of the profitability of the enterprise; and the second, in which such expenses may be straightway taken as revenue cost for the year of its incurring itself, which may not reflect a true and fair view of the profits on year to year basis. The contention of the ld. AR is that whereas Bodhtree fell into the second situation, the assessee was in the first situation. Though this contention about Bodhtree accounting for expenses in the year of incurring but considering income only on the conclusion of the project in the subsequent year sounded a little awkward, we attempted to find out the amount of capitalized expenses in respect of incomplete projects at the end of the year. Apparently, we could not find out any such capitalized value of work-inprogress in the balance sheet of the company on standalone basis. We directed the ld. DR to examine the Annual report of this company and point out the amount of expenses capitalized in respect of incomplete work at the end of the year. On the next date of hearing, the ld. DR f....
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....vailable in the annual report at page 1871, it is categorically mentioned that during the year under assessment, the company launched job portal viz. Logtalent.com which was instant success with job aspirants. Encouraged with success of this portal company proposed to launch 3 to 4 portal during the current financial year in the different fields. So, in the given circumstances, contention made by ld. Senior DR is misplaced and ld. DRP has rightly excluded CAT Technology from the final set of comparables. ITES SEGMENT GROUND NO.iii READ WITH GROUNDS NO.iv & v 86. The Revenue has challenged the exclusion of Coral Hub by ld. DRP on the ground that the same has been excluded without any valid reason. Before the ld. TPO, the taxpayer has sought exclusion of Coral on ground of functional dis-similarity and low employee cost ratio. Both these objections have been overruled by the ld. TPO. 87. However, the ld. DRP rejected Coral Hub as a comparable on ground of its outsourcing activities. Perusal of annual report, available at page 945 (P&L account for the year ending June, 2010), shows that Coral has outsourced its activities to the extent of 90% and its operating expenses on ....