TaxTMI 
TaxTMI 
2018 (1) TMI 1351
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....ommissioner of income Tax, Transfer Pricing Officer-1(3), New Delhi ('Learned TPO'), is bad in law and void-ab-initio. 2 That on facts and in law, the Learned AO has erred in computing the total income of the Appellant at INR 33,20,95,411 as against the returned income of INR 28,10,94,267 by making an upward adjustment of INR 4,89,94,226 and INR 20,06,918 with respect to transfer pricing ("TP") and corporate tax matters, respectively. Part I - Transfer Pricing Grounds 3 That on facts of the case and in law, the DRP/TPO/AO have erred in rejecting the economic analysis undertaken by the Appellant by conducting a fresh economic analysis for international transaction pertaining to provision of IT back office support services ("impugned transaction"). 4 That on facts of the case and in law, the DRP/TPO/AO have erred in rejecting certain companies and adding certain companies to the final set of alleged comparable companies on an ad-hoc basis, thereby resorting to cherry picking of comparable companies for benchmarking the impugned transaction. 5 That on facts of the case and in law, the DRP/TPO/AO have erred in selecting companies in the fina....
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....impugned transaction. 10 That on facts of the case and in law, the DRP/TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis-a-vis the alleged comparables for impugned transaction and in the process inter-alia neglected the Indian transfer pricing regulations, international guidelines on transfer pricing and judicial precedence in this regard. 11 That on facts of the case and in law, the DRP and TPO/AO have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act. 12 That on facts of the case and in law, the DRP/ TPO/AO have erred in using single year data for financial year ("FY") 2009- 10 of alleged comparable companies without considering the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price. 13 That on facts of th....
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....crutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short 'the Act') was issued and complied with. In view of the international transactions carried out by the assessee with its Associated Enterprises (AEs), the Assessing Officer referred the matter of determination of Arm's Length Price (ALP) of international transactions to the Ld. Transfer Pricing Officer (TPO). The Ld. TPO vide his order dated 20/01/2014 under section 92CA(3) of the Act, computed arm's length price (ALP) of the international transactions by making adjustment of Rs. 21,54,03,221/-. On the basis of the order of the Ld. TPO, the Assessing Officer proposed addition of Rs. 21,54,03,221/-. The Assessing Officer also proposed reduction in deduction of Rs. 20,06,918/- under section 10A of the Act in view of the re-allocation of director's salary amount in STP and non-STP units. The Assessing Officer issued a draft assessment order on 24.03.2014 proposing above two additions. The assessee filed its objections to the draft assessment order before the Ld. DRP. After considering the submission of the assessee, the Ld. DRP issued directions on 11/11/2014 to the Assessing Officer. The Assessing Officer af....
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....e and the "CDS" with regard to identified transactions, which have been reproduced by the Ld. DRP in their order, are extracted as under: Conceptualization of services The SPL is generally a 3 Phases, multi step process involving the collaboration among Product Management, Marketing and Product Engineering. The 3 phases of Product Engineering are Product Definition, Product Development and Servicing. In the Product Definition (Conceptualization) phase, a value proposition and a product prototype are developed based on customer feedback from the servicing phase, surveys, competitive analysis, the product leader's vision for future and CDS's overall vision for the product category. Then, marketing research is performed to test the value proposition and the marketing feasibility of a product prototype; The product leadership team and product engineers will work with the marketing research team to address software engineering issues and technical feasibility. When the prototype is finalized the next phase of the lifecycle begins. The second phase is Product Development, which is a 5 step process involving determination of the requirements, de....
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.... Upon receiving the approval from CDS, the development work is commenced by Cadence India. Coding, testing and documentation Cadence India undertakes code development in accordance with product specifications defined by CDS. The code generated is subsequently tested to ensure that functions performed by the code are in accordance with the protocol design and standard specifications. Cadence India generates and makes available documentation for the software developed and transferred. The software "developed by Cadence India is subsequently integrated into the final software product by CDS and other Cadence group entities. Project management Although the day-to-day management of the project is undertaken by Cadence India, CDS is responsible for the overall project management. CDS regularly conducts meetings to analyse the progress and monitors the project plan. Quality control, testing and integration Cadence India is responsible for ensuring that requisite quality/ performance standards are complied with while rendering services. 5.4 The assessee reported following international transactions: International Transactions....
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....ost (OP/OC) at 15.00% , which was revised by the Ld. TPO to 16.23% in view of allocation of depreciation of Palladium Machine. The assessee selected 10 comparables with weighted averages margin PLI. The comparables selected by the taxpayer are reproduced as under: Sl. No. Company Name OP/OC (%) as calculated by the taxpayer 1 CG Vak Software and exports Ltd. 0.53 2 Cosmic Global Limited 16.59 3 Informed Technologies Ltd. 31.46 4 Microgenetics Systems Ltd. 6.49 5 R Systems International Ltd. 7.15 6 Jindall Intellicom Pvt. Ltd. 18.67 7 Omega Healthcare Limited 15.31 8 E4e Healthcare business services Pvt. ltd. 21.01 9 Caliber point Business Sol. Ltd. 21.92 10 Axia IT & T Ltd. 13.51 5.9 Ld. TPO rejected seven comparables selected by the assessee as under: Sl. No. Comparables TPO's Comments 1 CG VAK Software and Exports Limited (Segmental) Fails turnover filter 2 Informed Technologies Limited Turnover is less than Rs. 5 crores 3 R Systems International Limited Financial year ending other than March 31 ....
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....e-Serve International Limited 54.13% 11 eClerx Services Limited NC Arithmetic mean 29.66 Operating cost 367,082,316 Arm's length margin 29.66% Ann's length price 475,958,931 Transfer Price 426,964,705 Adjustment 48,994,226 5.14 Before us, Ld. counsel of the assessee argued for exclusion of the four companies included by the Ld. TPO, namely, (i) TCS e-serve International ltd., (ii) TCS e-serve Ltd., (iii) Accentia Technologies Ltd., (iv) Infosys BPO Ltd. and inclusion of the two companies rejected by the Ld. TPO, namely, (i) CG- VAK Software & Exports Ltd (Segmental) and (ii) R systems International Limited (Segmental). 5.15 We have heard the rival submission and perused the relevant material on record and accordingly, the grounds of the appeal related to exclusion/inclusion of comparables are adjudicated as under: 6. First we take up the issue of exclusion of companies considered comparable by the Ld. Transfer Pricing Officer (A) TCS E-serve International Ltd. 6.1 Before us, the Ld. counsel relying on the submission made before the Ld. TPO and the Ld. DRP, submitted that due to peculiar econo....
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....On the issue of deemed RPT, he submitted that TCS Ltd has become the holding company w.e.f. 1st January, 2009 and, thus, in the year under consideration, the TCS Ltd is the holding company and, therefore, transaction of the company with city group clients is no more related party transactions. He further submitted that Ld. counsel has not given any evidence as the transaction was still governed by the old agreements. On the issue of 'TATA' brand, he submitted that first of all, 'Tata' brand has not affected the PLI of the company. Secondly, the assessee was also using "Cadence" brand. Further, he referred to page 281 of the compilation of the Annual Reports and submitted that the company incurred only expenses of Rs. 37.38 Lakhs towards 'Tata' brand equity contribution, which is 0.43% of the total expenses only. In view of submission, he stated that action of Ld. DRP in retaining the company as comparable was justified. 6.3 We have heard the rival submission and perused the relevant material on record. The contention of the Ld. counsel to reject the company as comparable on the ground of rise in turnover and profit as compared to last year, is not tenable. Under the transfer pri....
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....TTER OF THE CONTRACT 1. Authorization: Cadence India is authorized to provide the following services to die company and its affiliates: Back Office IT operations, comprising of UNIX / Windows Administration and Support; Internal Helpdesk Services: Application Development & Support; Web- Development & Support (collectively. 'IT Back Office Support') and Customer Support services." 6.6 The Ld. DRP in its order on page 43 has reproduced other pages of the Annual Report of the company indicating that the company was engaged in BPO services or ITES. 6.7 In view of the comparison of the services rendered by the assessee and the services rendered by the company , we are of the opinion that the company cannot be rejected on the ground of functional dissimilarity. 6.8 Further, the contention of Ld. counsel to exclude the company on the ground of non-availability of segment information is also not tenable as the company was functioning in one segment of ITES only. 6.9 The contention of the Ld. counsel for exclusion on the ground of deemed RPT is also not acceptable. w.e.f. 01/01/2009, the Tata consultancy services Ltd is the holding company of the....
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.... 105 of the Annual Report, the principal activities of the company reported are as under: "1. Background and principal activities TCS e-Serve Limited is engaged in the business of providing Information Technology - Enables Services (ITes)/Business Process Outsourcing (BPO) service, primarily to Citigroup entities globally. The company's operations broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical service involve software testing, verification and validation of software at the time of implementation and date centre management activities. 7.2 Thus, we find that the activities of the company are identical to the activities of TCS e-serve International Ltd., which are held to be in the nature of ITes and functionally similar to the assessee. Accordingly, we hold that the company cannot be excluded on the ground of functional dissimilarity. 7.3 The arguments of the Ld. counsel on the issue of non-availa....
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....nally or a network through a hosted web native platform operated by the software vendor, either independently or through third-party. According to him "SaaS" model mean only 'software as a service' and not development of software. 8.4 The Ld. counsel in his rejoinder referred to page 39 of the annual report and submitted that the acquisition of the IQ group companies UK was a strategic move in the direction to to increase the capability of the service delivery to offer the "SaaS" model to its clients. The Ld. counsel also referred to page 79 of the paper book and submitted that the company itself has admitted that in view of the amalgamation during the year under consideration, the figures of current year were not comparable with those of the previous year. 8.5 We have heard the rival submission and perused the relevant material on record. We find that the in assessment year 2009-10 in the case of the assessee itself, the company has been excluded by the Tribunal in ITA No. 2074/Del/2014. The relevant finding of the Tribunal is reproduced as under: "14.3 We have considered the rival submissions and also perused relevant finding given in the impugned order....
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....nd procurement, banking and capital outsourcing, media outsourcing, energy outsourcing, retail etc, which cannot be compared with the services of back-office support attended by the assessee. According to him, no segmental data of different functional activity is reported in the Annual Report. He further referred to page 177 of the Annual Report and submitted that the company has incurred heavy expenses of Rs. 69.16 lakhs for brand building and advertising, which is assisted in earning high profit, whereas no such expenses were incurred by the assessee. The Ld. counsel further referred to page 203 of the Annual Report and submitted that the company was having a turnover of Rs. 1,126.66 crores, whereas the assessee was having revenue of 42.70 crores from provision of IT backoffice support services. He further referred to page 115, 116 and 233 of the Annual Report and submitted that the company has acquired 'McCamish Systems LLC' during the year under consideration, which has impacted the profitability of the company. 9.1 Ld. CIT(DR), on the other hand, submitted that all the activity reported might be in different verticals but the function carried out falls under the categ....
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....ed 0.1% of the total turnover and which is insignificant. Further we agree with the contention of the Ld. CIT(DR) that the assessee has not brought on record any evidence that such expenditure has resulted into higher profit to the comparable company. Thus we reject the contention of the Ld. counsel of having impact of higher brand value expenses on the profitability of the company. 9.4 On the issue of large scale operations of the company, we find that company was having turnover of Rs. 1,126.63 crores as against Revenue of Rs. 42.70 crores reported by the assessee from provision of IT backoffice support services. The turnover of the companies 26.38 times the turnover of the assessee. In our opinion, turnover of the company cannot be a ground for rejecting a comparable until and unless, there is wide variation. Accordingly, this contention of the Ld. counsel of the assessee for excluding the company as comparable, is also rejected. 9.5 Further, the Ld. counsel objected the inclusion of the company on the ground of acquisition of Maccamish Systems LLC. Before the Ld. DRP also the assessee failed to adduce any evidence as how the merger had impacted the profitabili....
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....f the assessee company was more than Rs. 5 crore, but the turnover of the BPO segment was only 82.78 Lacs, thus it fails the turnover filter of Rs. 5 crore. 11.2 We have heard the rival submission and perused the relevant material on record. We find that in the assessment year 2009-10 also the turnover of the company was less than Rs. 1 crore, however, the Tribunal in ITA No. 2074/Del/2014 for the assessment year 2009-10 in the case of the assessee directed the TPO to include the company as a comparable company. The relevant finding of the Tribunal is reproduced as under:] "18.3 We have heard the rival submissions and perused the relevant finding given in the impugned order. The main reason for not including this company is that its turnover is less than Rs. 1 crore. So far as exclusion of this comparable on basis of turnover filter criteria of less than Rs. 1 crore, we find that, first of all, it was a comparable chosen by the assessee and at the time of selection process the assessee as stated had not applied any turnover filter for accepting or rejecting the comparables. Once the turnover filter has not been applied at the quantitative level then comparability ....
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.... respectfully, following the finding of the Tribunal (supra), we set aside the direction of the Ld. DRP and direct the AO/TPO to include 'CG Vak Software and exports Ltd' (segment) as a comparable company. R Systems International Ltd. 12. The Ld. counsel referred to pages 522, 523 and 611 of the compilation of the Annual Report and submitted that the company was engaged in providing IT solutions and BPO services, which being functionally similar to the transaction of the assessee under consideration. He further submitted that filter of different financial year applied by the Ld. TPO is not an appropriate filter. The Ld. counsel submitted that the company has been included as comparable by the Tribunal in assessee's own case for assessment year 2009-10, wherein relying on the ruling of the Hon'ble Punjab and Haryana High Court in CIT versus Mercer Consulting India Private Limited (ITA No. 101 of 2015), it is held that if the audited quarterly results can be used to compute margin for the year ending on March 2009, then company should be included in the final set of comparables. 12.1 The Ld. CIT(DR), on the other hand, relied on the finding of the Ld. DRP in para-6.5.2 of th....
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....#39; carried out in order to bring the data at par with that of the taxpayer: i. Apportion the data from preceding or subsequent period so as to make data equivalent to the financial year available for comparison with the international transaction. ii. While apportioning such data, adequate care needs to be taken so that the Profit Level Indicators are computed comparably. 3. For the determination of profit level indicators, certain entries having bearing on the cost and income are- interest, provisions, losses/ gains on account of foreign exchange, etc, which normally as per the business practice are accounted for at the end of the accounting year. Under both the situations, whether the data pertaining to the period prior to the accounting year or subsequent to the accounting year are integrated with the relevant portion of the accounting year of the comparable, the same gives a lopsided picture of the accounts so far as the financial year data is concerned. Since, there is no requirement as per company law or as per accounting standards that the data pertaining to a particular quarter needs to be closely compartmentalized by providing for various provis....
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....es maintaining accounts in terms of period other than the financial year to be treated as uncontrolled transaction for the purpose of determination of ALP. The Panel, therefore, rejects the objection of the taxpayer on this account." 12.3 However, we note that the Tribunal in ITA No. 2074/Del/2014 for assessment year 2009-10 in the case of the assessee itself has held the company as comparable despite being different financial year. The relevant finding of the Tribunal is reproduced as under: "19.2 We have heard rival submissions and also perused the relevant finding given in the impugned order. This comparables company has been rejected not on the ground of functionality albeit on the ground that it is following the financial year accounting from January to December (i.e. calendar year). Though a comparable company following a different financial year may not be generally taken for comparability analysis, however, if financial data is available for all the quarters including January to March and it is otherwise possible to determine the value of the transaction as well as the profitability during the corresponding period, then it suffices the comparability criteria. Be....
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....ite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the Transfer Pricing Officer must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29. As noted by the Tribunal, the audit accounts ofR System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. 30. This view is not contrary to Rule 10(B)(4) which reads as under:- "10B(4) The data to be used in analysing the comparability of an international transaction shall be the data relating to the financial year in which the international transaction has been entered into." ....
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....has followed the decision of the Hon'ble Punjab and Haryana High Court in Mercer Consullting India Private Limited (supra), We feel it appropriate to restore this issue to the Ld. AO/TPO for computation of margin of the company for the period from 01/04/2009 to 31/03/2010 from the adjusted data of relevant years. The assessee is directed to provide relevant audited accounts of the company. 14. Accordingly, the grounds of the appeal related to transfer pricing adjustment are allowed partly for statistical purpose. 15. The corporate issues raised in ground numbers 15 to 17, relate to allocation of directors remuneration between STP unit and non-STP unit. Before us, both the parties admitted that this matter had come for consideration before the Tribunal in the assessee's own case in assessment year 2008-09 in ITA No. 39/Del/2013 order dated 20/05/2016, wherein the matter has been remanded back to the file of the AO for fresh examination. 15.1 We have gone through the decision of the Tribunal and the relevant finding, and find that this precise issue has been dealt by the Tribunal in assessee's own case. We also find that the Tribunal in assessment year 2009-10 in ITA No. 207....
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....al errors in the working of the disallowance under sec. 10A of the Act by the Assessing Officer at page Nos. 6 to 8 of the assessment order. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 19. Considering the above submissions, we find that in the case of CTT vs. Western Outdoor Interactive (P) Ltd. (supra), the Hon'ble High Court has been pleased to hold that benefit of deduction under sec, 10A is available for a particular number of years on satisfaction of certain conditions under provisions of the Act and unless relief granted for first assessment year in which claim is made and accepted, the Assessing Officer cannot withdraw relief for subsequent years, Undisputedly, it is 8th year of the claim of deduction under sec. 1 OA of the Act made by the assessee and it has been allowed in earlier years and in subsequent remaining two assessment years, i.e. 2009-10 and 2010-11. Before the ITAT, as discussed above, the Learned AR has tried to meet out the objections raised by the Assessing Officer in making the disallowance of the claimed deduction. In brief, the submission of the assessee again....
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....akes made by the Assessing Officer is Rs. 32,05,095 which matches with fixed assets scheduled submitted to the Assessing Officer during assessment proceedings. Against the objection of Assessing Officer that invoices raised in US dollars are not verifiable with amounts recorded in books as some amounts is in INR, the submission of the assessee remained that all the details on account of service income was furnished before the Assessing Officer; invoices are usually raised in USD, however, if there is. an adjustment entry to be passed, same is passed in INR in the ledger account; and audit adjustment entry was passed by auditor for financial year 2007-08; bonus expenses pertaining to financial year 2008-09 inadvertently considered by Cadence India as cost for financial year 2007-08 and as the assessee operates on a cost plus model invoice on such cost was raised already in financial year 2007-08; etc. The grievance of the assessee in this regard also remained that the Assessing Officer has not followed DRP's directions. It was submitted that as per directions issued by the DRP, the Assessing Officer was directed to rectify the details of accounts submitted by the assessee with r....