TaxTMI 
TaxTMI 
2018 (7) TMI 1090
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.... in respect of provision of Information Technology ("IT") enabled services and Rs. 2,9313,479 in respect of outstanding receivables. In doing so, the Ld. A.O./ Ld. TPO have grossly erred in: 2.1. not allowing adjustment to comparable's margin on account of differences in the rates of depreciation charged by the Appellant visa- vis that of comparables; 2.2. application of incorrect Profit Level Indicator ("PLI") for the purpose of determination of Arm's Length Price ("ALP"); 2.3. considering the amount of reimbursements (received by the Appellant) as a part of cost but not as a part of income while computing the Operating Profit/ Total Cost ("OP/TC") margin of the Appellant; 2.4. not applying appropriate interest rate for the computation of interest on outstanding receivables. 3. The Ld. A.O./Ld. TPO erred on facts and in law in enhancing the income of the Appellant by Rs. 12,40,78,385 holding that the international transactions pertaining to provision of IT enabled services do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in: 3.1. disregarding the ALP as determined ....
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....nt of expenses received as part of the core transaction of the Appellant and re-computing the PLI after considering it as part of the operating revenue and operating cost, thus, in effect proposing that a mark-up is required to be earned on such non-core, non-value adding pass through transactions. 5. The Ld. AO/ Ld. TPO erred on facts and in law in enhancing the income of the Appellant by Rs. 2,93,13,479 holding that the alleged international transactions pertaining to outstanding receivables do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in: 5.1. re-characterizing the outstanding related party receivable from overseas AEs beyond 90 days period as short term loans advanced to the AEs; 5.2. disregarding the business/ commercial arrangement by not appreciating the fact that unlike a loan or borrowing, outstanding receivable is not an independent transaction which can be viewed on standalone basis and needs to be examined with the commercial transaction as a result of which the debit balance has come into existence; 5.3. rejecting the Appellant's contention that independently be....
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.... without appreciating the fact that any dividend income earned on investment in equity shares of foreign subsidiaries is not an exempt income under the Act and no disallowance under section 14A of the Act is warranted on such investment. 10.3. The Ld. A.O./Ld. DRP erred in law and on the facts and circumstances of the case by stating that the Appellant has made fresh investment during the year whereas no investment has been made by the company during the year under consideration. 10.4. The Ld. AO/Ld. DRP erred in law on the facts and circumstances of the case by ignoring the fact that no exempt income has been earned by the company during the year under consideration. 11. The ld.AO has grossly erred on facts and in law by initiating penalty proceedings u/s 271(1)(c ) of the Act mechanically and without recording any satisfaction for its initiation. 12. The Ld.AO has erred in law and on the facts of the case by charging interest u/s 234B and 234D of the Act." 2. Brief facts of the case are as under: Assessee filed its return of income for the year under consideration on 29/11/11 declaring total income of Rs. 66,58,545/-. The case was selecte....
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....f above we start with Ground No. 2.3. 5. Ground No. 2.3 raised by assessee is against disallowance of reimbursement of expenses incurred by assessee on behalf of its AE pertaining to travel cost, marketing cost etc. 5.1. Ld.Counsel submitted that these expenses have been reimbursed by its AE on actual expenditure incurred by assessee and accordingly no adjustment is called for. The total expenditure incurred by assessee towards travel cost, marketing cost etc amounts to Rs. 6,40,07,521/-. It has been submitted that Ld. TPO had made an adjustment of the said sum on the basis that reimbursements being international transaction in terms of section 92B which are closely linked to assessee's main transactions of providing IT enabled services to its AE. It has been observed by Ld.TPO that the amount involved are substantial and by making payments on behalf of its AE, assessee has performed a service to the AE by using its financial and other services. Ld.TPO was of the opinion that assessee's funds were used for the benefit of AE even though assessee had debited a substantial amount of interest in its P&L account. 5.2. Upon raising objection before DRP, it was held that reimburs....
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....d that this issue stands squarely covered by Delhi Tribunal in assessee's own case in ITA No. 2075/Del/2015 for immediately preceding Assessment Year being 2010-11. Delhi Tribunal in assessee's own case for assessment year 2010-11 (supra) decided this issue as under: "12. In view of what has been discussed above and by following the decision of the Coordinate Bench of the Tribunal in Kadimi Tool Manufacturing Co. (P) Ltd. (supra) which has been confirmed by the Hon'ble High Court as well as Hon'ble Apex Court, we are of the considered view that when undisputedly, the taxpayer is a debt free company, there is no question of charging any interest on receivables by recharacterizing the transaction as loan from its AE and as such, no adjustment on account of arm's length interest on receivables can be made. Consequently adjustment made by the TPO/DRP on account of arm's length interest on receivables is not sustainable in the eyes of law, hence ordered to be deleted. Consequently, grounds no. 2, 2.1, 2.2, 2.3, 2.4, 2.5, 3, 4 & 5 are determined in favour of the taxpayer." It has been mentioned by Ld. counsel that there is no functional difference in the present year under consider....
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..... shall pay charges (the "Charges") to Inductis for the Services on the basis of the costs borne by Inductis in rendering the Services plus an arm's-length margin. The arm'slength margin effective on the Effective Date is set forth below and shall be subject to change over the term of the agreement by mutual agreement of the parties: Cost +1 9% "Cost" - Cost includes alt the expenses incurred in performance of the Services including, but not limited to payroll and employee related expenses and facility and technology costs which are set forth in Exhibit A. 3.2. In addition to the Charges, Inductis Inc. shall pay to Inductis (i) any applicable services tax and/or other statutory taxes that are charged on the Services; and (ii) all travel related expenses (Travel Related Expenses") incurred by Inductis for Services rendered at the customer's site. Travel Related Expenses shall mean and include actual charges in respect of the air ticket, visa, overseas medical insurance, boarding and lodging expenses, kit allowance, per diem and any other allowance paid by Inductis. Any service debits or credits arising under any Service Agreement shall accrue t....
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....ecision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.), which dealt with question of law : (c) 'Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?' He pointed out that while answering the above question, Hon'ble Bombay High Court noticed that amendment to section 92B has been carried out by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon'ble Bombay High Court restored the issue to the file of the Tribunal for fresh decision in the light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of s....
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....hich need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions." In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Assessing Officer/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. 6.9. Accordingly we set aside this issue to Ld. AO/TPO. 7. Now we shall take up the comparable analysis on the basis of the comparables which has been agitated by assessee of having been wrongly included/excluded by ld.TPO in the final list. Before 18 doing so it is sine qua non necessary to understand the functional profile, as it ....
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.... undertaken Assessee do not bear any risk except for foreign exchange risk as it receives its payment from AE in foreign exchange. All other risk regarding the services rendered like business risk, credit and collection risk, service liability risk, rework risk are assumed by its AE's. 8. Thus on the basis of the above, the TP study has characterised assessee as a captive contract IT enabled service provider operating in a low risk or risk mitigated environment. Ld.TPO observed that assessee had selected 12 comparables as comparables with an average margin of 16.33% viz-a-viz assessee's own margin worked out at 19.55%. It had applied TNMM as the most appropriate method with OP/OC as a PLI. Assessee thus concluded its international transaction to be at arm's length. 9. Unsatisfied with the comparables selected by assessee, ld. TPO undertook research activity and proposed 8 comparables having average margin of 29.57%. Ld.TPO accordingly worked out the arm's length price of assessee at a margin of 29.57% and proposed an adjustment of Rs. 33, 600, 539/-. 10. Aggrieved by adjustment proposed by Ld.TPO, assessee raised objections before DRP. DRP directed to exclude following ....
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....ny is engaged into diversified activities such as Knowledge Process outsourcing(KPO), Legal process outsourcing(LPO), Data process Outsourcing(DTO), high end software services. As the segmental results are also not available, we direct Ld. TPO/AO to remove this company from the final list. (II) TCS E-Serve Ltd The Ld. TPO had included this company as a comparable. Ld. Counsel submitted that this company provides financial information processing and customer contact services with highlevel of foreign expenditure and abnormal profits. Ld. DR, by placing reliance upon the order passed by ld. TPO submitted that this company is comparable with assessee. He relied upon decision of Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. reported in (2015) 56 Taxmann.com 417 We have perused the submissions advanced by both sides in the light of records placed before us. From the financials of this company placed at page 594-715 of paper book it is observed that technical services offered by this company are in the nature of servicing and maintenance of software testing, verification and validation of software, which are akin to software....
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....rder to extrapolate the financials for the purposes of computing the margin. (IV) Informed Technologies India Ltd This comparable has been rejected by Ld.TPO on the basis that it has income less than 5 crore. Ld.Counsel submitted that this company is operating as IT enabled, knowledge-based back-office processing centre and serves the needs of the financial content sector in the US. It has been submitted that the company collects and analyses data on financial fundamentals, corporate governance, director/executive compensations and capital market. The outsourced services consist of financial database and backoffice activity for research/advisory report. He thus submitted that this company is comparable with that of assessee. Ld.DR at the outset relying upon the annual report at page 722 submitted that the company has been categorised as operating in IT enabled knowledge-based back-office processing centre. He submitted that the revenue earned by this company is from sales and services as well as other income. It is also submitted that there is no separate segmental details in respect of the 2 separate services rendered by this company. He submitted that the functions ca....
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....ns advanced by both the sides in the light of records placed before us. In our considered opinion DRP u/s 144C(8) has powers to enhance variations proposed in the Draft assessment order. In view of the above we remit this issue back to Ld. TPO to carry out the working capital adjustment as per the directions of DRP. 12.3. Accordingly this ground stands allowed for statistical purposes. 13. Ground 10 Corporate Tax Issue : The only issue contested is in respect of disallowance under section 14 A read with rule 8D. 13.1. Ld.Counsel submitted that assessee has not earned any exempt income. It has been submitted that investments made by assessee are old investments in foreign subsidiary company situated in Singapore, dividend from which if any received, is not exempt from tax in India. He submitted that Ld. AO made disallowance of 0.5% of average investments made in foreign subsidiary company as per rule 8D which deserves to be disallowed. Ld. DR though supported the orders of authorities below, could not controvert that the investments shown in the accounts of assessee are also in domestic companies. It is also an admitted fact that assessee has not earned any exempt inc....