AI Drafter 
TaxTMI 
TaxTMI 
2018 (4) TMI 79
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....use title of this order. ITA No.857/Kol/2011 (A.Y.2007-08) : 3. The first issue that arises for consideration in this appeal by the assessee is with regard to determination of Arms Length Price in respect of an international transaction of rendering software development services by the assessee to its Associated Enterprises. (AE). The assessee rendered software development services to Koninklijke Philips Electronics N.V., Netherlands (KPE NV). As per the agreement the assessee charged KPE NV 10% mark up on cost for rendering software development services. The value of the international transaction with the associated enterprises was a sum of Rs. 329.9 crores. Since the transaction between the assessee and its AE was a international transaction, income from the same has to be determined having to arms length price (ALP) in view of the provision of section 92 of the Act. The assessee to substantiate the price charged by it in international transaction was at arm's length, filed a Transfer Pricing Study (TP Study). The Assessee in its transfer pricing study adopted the Transaction Net Margin Method (TNMM) as the most appropriate method for determining arm's length price. The ass....
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....23%. Thus the arm's length price is more than 5% of the price at the international transaction was undertaken. Hence, by taking the operating profit on operating cost percentage as 18.61% as the benchmark, the arm's length price of international transactions representing provision of software development services by the assessee company to its AEs during the assessment year 2007-08 is re-determined as under: - . Operating margin declared by the assessee at 10.23% operating martin percentage Rs. 30.60 crores Operating profit margin taking the operating Margin percentage at 18.61% Rs. ....
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....ut prejudice to the generality of the above, the DRP and the DCIT erred in making a transfer pricing adjustment on the basis that the Appellant should have made operating margin! total cost margin of 18.61 % with respect to its software development activities. 4.2 The TPO, DCIT and DRP erred in facts and in law while rejecting the value of the international transactions as recorded in the books of account as being at arm's length. 4.3 The DRP and TPO erred in rejecting the transfer pricing study conducted by the Appellant. 4.4 The DRP and the TPO erred in arbitrary selection of certain comparable companies which were functionally dissimilar to the Appellant. 4.5 The DRP and the TPO erred in law and on facts in rejecting certain comparable companies based on application of arbitrary turnover filters. 4.6 The DRP and the TPO erred in computing the operating margin! total cost margin of 3i Infotech Limited in the benchmarking analysis. 4.7 The DRP and the TPO erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. 4.8 The DRP and the TPO er....
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....ting the PLI, the TPO has removed this item being extraordinary in nature for the relevant Financial Year. The Panel has considered this carefully and is of the view that this item is extraordinary in nature given the fact that in earlier years the comparable company was capitalizing this amount. In these circumstances, the Panel is of the view that no interference in this regard in the action of the TPO is called for." 9. As far as Aftek Ltd is concerned this was also a company chosen by the assessee in its TP study as a comparable company. As far as this company is concerned, the assesee had objected to inclusion of this company as a comparable company even before the TPO and the TPO rejected the claim of the assessee with the follows : "10.2. The assessee has requested to remove Aftek Ltd from the list of comparables. It is interesting to note that this company was included in the list of comparables provided in its Transfer Pricing Documentation Report not only for FY 2006-07 but also for 2005-06. Thus, its Report for FY 2006-07 mentions with approval that this company "is a full spectrum technology service provider company which provides IT services to design and deliver....
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.... 2.4. It owns significant intangible assets which the Appellant does not own/possesses 2.5. It was engaged in significant research and development activities; 2.6. During the year under consideration it has acquired various companies." 12. It has been mentioned in the application for admitting the additional ground that though these two companies were included as comparable companies in the TP study done of the assessee, it later transpired that these companies were not comparable companies and therefore the same should not be regarded as a comparable company. The assessee has also placed reliance on ITAT Chandigarh Special Bench in the case of Qua Systems Pvt. Ltd. (2010) 4 ITR (Trib) 606 (SB)(Chandigarh). The Special Bench took the view that Transfer Pricing law in India was still an evolving legislation and the judicial trend is being set into motion by decisions and therefore the assessee should not be denied the opportunity of showing as to how a company chosen by it as a comparable company was not comparable. The Special Bench took the view that when the cause of substantial justice and technical consideration are pitted against each other, the cause of substantial j....
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....nd Capital Markets. Also from the Annual Report, it is evident that the company has 50: 50 mix of services and product. [Page 102,104,110,58,119] - No segment data available : The company derives income from software products and software services. However no disclosure on segmental information is available in the standalone financial statements of the company. [Page 119] - Significant Research & Development activity - 11.02% : The company is also involved in significant R & D activities. During the FY 2006-07 the R & D expenditure amounted to 11.02% of the total revenue of the company. [Page- 11 & 5] - Significant Intangibles - 23.80% : The company has intangible assets in the form of goodwill and Business & Commercial rights. The total amount of intangibles is 23.90% of total fixed assets. [Page 95 & 104] - Acquisitions during the year : During the year under consideration the company has taken multiple acquisitions. The company acquired Datacons private limited, Stex Software private limited and others.. Also the company has acquired 51% stake in each US based PA [Page 4] 15. In the following decisions rendered by several Benches of the IT....
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....P. Ltd. 2007-08 [2016] 76 taxman.com 340 (Bangaluru-Trib) Para 17.3, (Pg. No. 17/23) 27 9. CSR India (P) Ltd. 2007-08 [2013] 31 taxman.com 265 (Bangaluru-Trib) Para 3.4.2., (Pg. No.3 & 11) 28 On account of Research & Development Activities 1. Caliberated Healthcare Systems India Pvt. Ltd. AY 2007- 08 TS-413-ITAT- 2014 (DEL)-TP Para-5, (Pg no.4/10) 29 2. Element K India Private Ltd. AY 2007- 08 [2015] 54 taxman.com 296 (Delhi-Trib) Para 18 (Pg. No. 12 & 13/19) 30 3. Principal Global Services Limited AY 2007- 08 [2016] 69 taxman.com 210 (Pune-Trib) Para 21., (Pg. No. 14&15/16 ) 31 On account of Significant Intangibles 1. Tesco Hindustan Service Centre Pvt. Ltd. 2007-08 [2017] 77 taxman.com 48 (Bangalore-Trib) Para 12.4 (Pg. No.13/34) 7 2. Marlabs Software Pvt Ltd 2007-08 TS-922-ITAT- 2016 (Bang)-TP Para 14.3 (Pg no.17/36) 11 3. Global e-Business Operations Pvt. Ltd. 2007-08 TS-35-ITAT- 2017(Bang)-TP Para 3/7 (Pg no.7,13) 12 4. H&S Software Development and Knowledge Management Centre Pvt. Ltd. 2007-08 TS-31-ITAT- 2017(DEL)-TP Pa....
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....-TP Para 3/7 (Pg no.7,13) 12 4. H&S Software Development and Knowledge Management Centre Pvt. Ltd. 2007-08 TS-31-ITAT- 2017(DEL)-TP Para 34 & 40 (Pg no.17/21) 13 5. Broadcom India Pvt. Ltd. 2006-07 TS-1010-ITAT- 2016(Bang)-TP Para 18.3.1 (Pg no. 25/34) 14 On account of Segmental Information not available 1. Witness Systems Software India (P) Ltd. 2007-08 [2013] 34 taxman.com 183 (Bangalore-Trib) Para 15, (Pg. No.16/19) 20 2. AMD India (P) Limited 2008-09 61 taxmann.com 35 Bangalore-Trib) Para 17.4, Pg. No.29/30) 21 3. Mis. Radisys India P. Ltd. 2010-11 TS-489-ITAT-2015 (Bang) Para 20, (Pg. No.9 & 10/15) 22 4. M/s ARM Embedded Technologies Pvt. Ltd. 2006-07 & 2007- 08 TS-669 ITAT- 2015(Bang)-TP Para 7.2, (Pg. No.13/77 ) 23 5. Telcordia Technologes India (P) Ltd. 2007-08 [2012] 22 taxmann.com 96 (Mum) Para 7.2, (Pg. No.3/16 ) 24 6. M/s NTT Data India Enterprises Application Services Private Limited Hyderbad 2007-08 TS-39 ITAT-2016 (HYD) - TP Para-7.4, (Pg no.9/23) 25 7. M/s. Polaris Consulting & Services Ltd....
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....e. Nevertheless since these details have not been examined by the TPO, we deem it fit and proper to restore this issue to the TPO to enable him an opportunity of examining the claim of the assesse. The TPO shall decide on the comparability of these two companies in accordance with law and in the light of the various contentions put by the assessee before us and in the light of the decisions rendered by the tribunal cited by the ld. Counsel for the assessee before us. We make it clear that the factual details given on the comparability alone should be examined and factually if the data is found correct, then the aforesaid two companies should be excluded from the list of comparable companies. 19. The next grievance of the assessee is with regard to the action of the TPO and DRP in not giving appropriate adjustments to the profit margin of the comparable companies and of the Assessee on account of working capital adjustment. On the question of working capital adjustment the DRP in its order has made the following observations :- "The assesee also had with it the data required for computation of working capital adjustment but it did not make any such computation. The OECD ....
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....sessee that the TPO again in A.Y.2004-05 in its order dated 15.05.2006 has himself allowed working capital and risk adjustment at 2% and similar allowance of such adjustments in the present assessment year should be done. The following are the relevant observations of the TPO in A.Y.2004-05 :- "Taking all these into account, the computation provided by the tax payer cannot be accepted as reliable. However it is not fair to deny the benefit of adjustment altogether. Hence, an overall adjustment of (-2%) is given towards working capital level differences and also towards risk level differences. " 22. After considering the submissions of the learned counsel for the Assessee, we are of the view that similar adjustments should also be allowed in the present assessment year. We hold and direct accordingly. We also observe that the principle reasons assigned by the DRP in the present assessment year was lack of details furnished by the assessee. In this regard we find that all the details have been given by the assessee in its transfer pricing study and we find that the observations of the DRP in this regard cannot be sustained. We accordingly direct that adjustment of 2% towa....
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....unt of club fee payment stands deleted." 28. The tribunal following the decision of the Hon'ble Supreme Court in the case of United Glass Manufacturing Co. Ltd. In C.A.No.6447 of 2012 dated 12.09.2012 wherein it was held that club expenses of employees was business expenditure allowable u/s 37 of the Act, allowed the claim of the assessee. Respectfully following the decision of the tribunal in assessee's own case we direct the AO to allow the claim of the assessee for deduction. 29. Ground No.7 raised by the assessee reads as follows :- " 7 Provision for replacement guarantee The DRP and DCIT erred in law and on facts in disallowing Rs. 1,45,98,000 being the excess of provision for replacement Guarantee over actual payment." 30. The facts with regard to ground no.7 are that during the relevant assessment year the assessee has made provision for replacement guarantee amounting to Rs. 29,12,44,000/- and actually paid amounting to Rs. 27,66,46,000/-. The Assessee is mainly engaged in the manufacture and sale of durable consumer electronics goods like television sets, domestic appliances etc. These products carry a warranty period. The warranty period varies from product....
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....ssee as made in ground no.7. 34. In the result the appeal of the assessee is partly allowed. ITA No.1894/Kol/2012 (A.Y.2008-09) 35. Ground Nos. 1 to 7 raised by the assessee is with regard to determination of arms length price in respect of an international transaction carried out by the assessee with its Associated Enterprises (AE) Kaninklijke Philips Electronics NV, Netherlands. The facts for A.Y.2008-09 are identical to the facts as it prevailed in A.Y.2007-08. The method of determination of arms length price and the PLI chosen by the assessee were identical as in A.Y.2007-08. The assessee chose nine comparable companies whose arithmetic mean of operating margin was 3.1%. The assesse's PLI was 13.76% computed in the following manner :- Philips Electronics India Ltd Assessment year 2008-2009 P/L details for Software Division Rs. in Min Particulars Amount Turnover 2,512 Less: Expenses Depreciation 166 Salaries, Wages, Bonus, Comtn. 999 Contrb to Pension & Prov Fund 53 Staff Welfare 66 Rent 72 Power & Fuel ....
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....g martin percentage Rs. 30.40 crores Operating profit margin taking the operating Margin percentage at 23.18% Rs. 51.20 crores Arm's Length Price Adjustment Rs. 20.80 crores Hence, an upward adjustment of Rs. 20.80 crores is to be made to the total income of the assessee company." 37. In respect of the ob....
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....x Rules, 1962 ("the rules") 4.1. The Learned AO, DRP and TPO have erred in law and facts in disregarding the comparability factors specified under Rule 10B(2) of the Rules and the provisions contain the Rules that specify that an adjustment should be made to account for differences between the transactions that may materially affect the price of such transactions. 4.2. Without prejudice to the generality of the above, the Learned TPO, AO and the DRP have erred on facts in comparing the transactions of the captive software services of the Appellant with companies operating as full-fledged risk-bearing companies without considering the differences in the risks undertaken by the comparable companies vis. a vis the Appellant, the adjustments of which, in any case ought to have been allowed. Similarly, there has been failure to allow economic adjustments on account of differences in working capital between the Appellant and the companies selected as comparables. 5. Use of contemporaneous data The Learned AO, DRP and the TPO erred in facts and in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the tra....
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....own case for AY 2006-07 : Aftek Limited was rejected in the Appellant own case of AY 2006-07 on the basis of Significant Intangibles. - Significant Intangibles - 95.56% : In the AY 2008-09, Aftek has Intangibles amounting to 93.84% of the gross block of fixed assets and 95.56% of net block of fixed assets in the current year. Hence the company should be rejected. [Page - iv,vi,39,49] - Functionally not comparable : Aftek Limited is not functionally similar to the Appellant as according to the information available in the annual report, the company is engaged in software services, software products and SDP. Further, the Company's SDP group has expanded its business during the year. The services provided by the company includes engineering services which are different from the services provided by the appellant. i., i,43,47,55] - No Segment data available : The company is involved in both sale of products and services. However, there is no segmental information available for the same [Page- 57] Sl.No. Relevant case law Assessment Year Broad Reason for Rejection Citation Para & Page No. of Case Law 1. M/s Philips Ind....
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.... 5. Stryker Global Technology Centre Pvt. Ltd. 2008-09 TS-450-ITAT-2015(DEL)-TP Para 12, (Pg. No.13,14/19) 31 6. Bearing point Property Services Private Limited 2008-09 [2014] 52 taxmann.com 96 (Bangalore - Trib.] Para-13.63,14, (Pg 12/23) 7 7. Sonus Networks India Private Limited 2008-09 [2015] 59 taxmann.com 474 (Banglore-Trib) Para -17.3, (Pg No.21/25) 32 8. FCG Software Services (India) Pvt. Ltd. 2008-09 [2014] 51 taxman.com 75 (Bangaluru-Trib) Para 15.3, (Pg. No.23/27) 33 9. 3DPLM Software Solutions Ltd. 2008-09 [2014] 42 taxman.com 333 (Bangaluru-Trib) Para 17.4, (Pg. No.25/28 2 10. AMD India (P) Limited 2008-09 61 taxmann.com (Bangalore - Trib) Para 17.4, Pge 29/30) 21 3i Infotech Limited - Margin as per TPO = 40.04% Page No. of Annual Report Summary of Assessee's Objections : Functionally not comparable - Engaged in products [Page- iv,v,viii,4,34,35,39,41,103] Functionally not comparable - diversified activities : The company is engaged in diversified activity. Moreover, the company offers wide range of software products, so....
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....com 401 (Delhi-Trib) Para 12.8, (Pg. No.11/13) 29 3. Open Solutions Software Services 2010-11 [2017] 81 taxmann.com 177 (Delhi-Trib.) Para 11, (Pg. No.8/9 5 4. BC Management Services Pvt. Ltd. Dy. CIT, Circle 4(1) 2011-12 TS-438 ITAT- 2017 (DEL)-TP 14, (Pg. No.15/36 ) 30 5. Stryker Global Technology Centre Pvt. Ltd. 2008-09 TS-450-ITAT- 2015 (DEL)-TP Para 12, (Pg. No.13,14/19) 31 6. Bearing point Property Services Private Limited 2008-09 [2014] 52 taxmann.com 96 (Bangalore - Trib.] Para-13.63,14, (Pg 12/23) 7 7. Sonus Networks India Private Limited 2008-09 [2015] 59 taxmann.com 474 (Banglore-Trib) Para -17.3, (Pg No.21/25) 32 8. FCG Software Services (India) Pvt. Ltd. 2008-09 [2014] 51 taxman.com 75 (Bangaluru-Trib) Para 15.3, (Pg. No.23/27) 33 9. 3DPLM Software Solutions Ltd. 2008-09 [2014] 42 taxman.com 333 (Bangaluru-Trib) Para 17.4, (Pg. No.25/28 2 10. AMD India(P) Limited 2008-09 61 taxmann.com (Bangalore - Trib) Para 17.4, Pge 29/30) 21 On Account of Related Party Transactions 1. Sun Gard Solutions (India) (P)....
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.... Para 12.4, (Pg.no.13/34) 7 6. Marlabs Software Pvt. Ltd. 2007-08 TS-922-ITAT- 2016 (Bang)-TP Para 14.3(Pg no.17/36) 11 7. Global e- Business Operations Pvt. Ltd. 2007-08 TS-35-ITAT- 2017 (Bang)-TP Para3/7(Pg no.7,13) 12 8. H&S Software Development and Knowledge Management Centre Pvt. Ltd. 2007-08 TS-31-ITAT- 2017 (DEL)-TP Para 34&40 Page 17/21 13 On account of Mergers/Acquisitions 1. FISERV INDIA PVT. LTD. 2008-09 TS-262437-HC- 2016 (DEL)- TO6 (DEL)-TP Para, (Pg no. 4,6/6) 24 2. M/s Cashedge India Pvt. Ltd. 2008-09 TS-262-HC- 2016 (DEL)-TP Para 6, (Pg no. 3/4) 15 3. CES Pvt. Ltd. 2006-07 TS-338-HC-2014 (AP)- TP Para-4, (Pg no. 2/5) 17 4. Xchanging Technology Services India Pvt. Ltd. 2009-10 TS-555-HC- 2015 (DEL)-TP Par 3, (Pg no. 2/2) 16 5. Century Link Technologies India Pvt. Ltd. 2008-09 TS-555-ITAT- 2017 (Bang)-TP Para 18.5, (Pg no. 22,28/29) 25 6. Lubroiizol Advnced Materials India Private Limited (Formerly known as Indiamalt Private Limited.) 2008-09 TS-1025-ITAT- 2016 (Ahd)-TP Para 8,, (Pg no 4/6) 26....
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....segmental data is available vis-a-vis its various activities; 2.3. It owns significant intangible assets which the Appellant does not own/possesses 2.4. It was engaged in significant research and development activities; 2.5. During the year under consideration it has acquired various companies. 2.6. It has entered into transactions with related parties. 3. Re.: The Appellant submits that, notwithstanding the fact that it had considered 'Persistent Systems Ltd.' as a comparable company before the lower authorities, considering the facts and circumstances of its case and the law prevailing on the subject, 'Persistent Systems ltd.' cannot be considered as a comparable company while benchmarking the international transactions in relation to software development services rendered by the Appellant to its AE, for the following specific reasons amongst other reasons: 3.1. It is functionally not comparable with the Appellant as it is engaged In the business of software services and software products; 3.2. No segmental data is available vis-a-vis its activities of sale of software products and rendering of software services; 3.3. It was engaged in sign....
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....ed 2008-09 Segmental not available [2014] 52 taxmann.com 96 (Bangalore - Trib.] Para - 15, 16 (Pg No.13/23) 7. Ciena India Pvt. Ltd. 2008-09 Segmental not available [2015] 57 taxmann.com 329 (Delhi Trib.) Para - 9.2, (Pg No.- 9/13) 8. Global Logic India Pvt. Ltd. 2008-09 Functionally different [2015] 59 taxmann.com 433 (Delhi-Trib.) Para-16,(Pg No.11/12) 9. GXS India Technology Centre Pvt. Ltd. 2008-09 Functionally different [2015] 62 taxmann.com 276 (Bangalore - Trib.) Para- 13.3,(Pg No.20/28) 10. PMC - Sierra India Pvt. Ltd. 2008-09 Segmental not available [2015] 74 taxmann.com 110 (Bangalore - Trib.) Para- 17.3,(Pg No.26/30) 11. Trilogy E-Business Software India Pvt. Ltd. 2008-09 Functionally different & Signmental not available [2016] 70 taxmann.com 378 (Bangalore-Trib.) Para-17.3, (Pg No 23, 24/32) 12. Agnity India Technologies Pvt Ltd. 2009-10 Functionally different 16, 17 Para-13.3, (Pg No.7/10) On account of Research & Development Activities 1. Caliberated Healthcare Systems India Pvt. Ltd. AY 2007- 08 TS-413-ITAT- 2014 (DEL)-TP ....
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.... account of working capital adjustment. On the question of working capital adjustment the DRP in its order in para-13 rejected the request for adjustment on account of working capital by following its order in Assessee's case for AY 2007-08. 48. We have heard the rival submissions on this issue which is identical to the submissions made in AY 2007-08 which we have discussed in the earlier part of this order. As decided in AY 2007-08, we are of the view that the issue should be set aside to the AO for fresh consideration. The Assessee should file computation of working capital adjustment as per formula for calculating the working capital adjustment before the TPO. The TPO is directed to examine the working capital adjustment in accordance with law. 49. In view of the aforesaid conclusion we are of the view that other issues raised in ground nos. 1 to 5 does not require any consideration and are left open. This issue with regard to transfer pricing adjustment is treated as allowed for statistical purposes. 50. Ground No.8 and 9 raised by the assessee read as follows :- "8. Entrance fees, subscription and cost of facilities paid to clubs The Learned AO and DRP erred in ....
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....he disallowance of lease rentals claimed on vehicles was confirmed by the ITAT too. The ITAT then upheld that the disallowance on the logic that the payments were not revenue in nature. The AO has made the disallowance as facts are identical to facts in A Y 2003-04. Hence, the DRP rejected the objection relating to the allowance of lease rentals. In so far as the question of allowance of depreciation is concerned, the DRP held that since the claim of depreciation was not made before the A O, the same cannot be allowed. 55. Before us it was agreed by the parties that similar issue raised in assessee's own case was considered and decided by the tribunal in ITA No.1141/Kol/2016 for A.Y.2009-10 order dated 05.04.2017 and ITA No.505/Kol/20156 and ITA No.2408/Kol/2016 for A.Y.2009-10 order dated 27.06.2017. For A.Y.2009-10 the tribunal dealt with this issue in the following manner : "Ground Nos. 6 to 6.3 The brief facts of this issue is that the assessee claimed lease rental paid for motor car taken on finance lease from Citi Corp amounting to Rs. 5,50,99,000/-. The same was treated as capital expenditure by the ld AO based on the reliance placed in assessee's own case for the A....