TaxTMI 
TaxTMI 
2019 (1) TMI 1136
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.... Part I - Transfer Pricing Matters 3. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. AO have grossly erred by not appreciating the correct functional profile of the Appellant and drawing an erroneous conclusion that the Appellant is engaged in providing high-end software services. 4. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. AO has vitiated the principles of natural justice by not giving due cognizance to the detailed analysis and technical arguments in response to the show cause issued by the Ld. TPO and objections filed with the Hon'ble DRP. The details of these arguments and analysis will be elaborated during the course of hearing before the Hon'ble ITAT. 5. The transfer pricing adjustment of Rs. 2,14,48,19,158 made by the Ld. AO based on the order of Ld. TPO giving effect to the directions issued of the Hon'ble DRP is bad in law inter-alia for the reason that: a) the order of the Ld. TPO is bad in law in as much as based on an invalid reference made by the Ld. AO without complying with the statutory requirements; b) the Appellant's AE being chargeable to tax at a higher rate in the US, there was no question of shifting of any pr....
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....in law, the Hon'ble DRP and the Ld. TPO/Ld. AO have erred by wrongly rejecting certain companies and adding certain companies to the final set of comparables for the Impugned Transaction, on an adhoc basis. Thus, they have resorted to cherry picking of comparables to determine the ALP for the Impugned Transaction. 10. That on facts and in law, the Hon'ble DRP and the Ld. TPO/A.O have erred by treating foreign exchange fluctuations, bank charges, 'provision for doubtful debts and liabilities and provisions no longer required written back' as non-operating items while computing the operating profitability of the Assessee as well as the comparables. 11. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. AO have erred by not considering upkeep/ maintenance expenses incurred in connection with a property let out by Appellant as non-operating while determining the operating profit or the tasted party. 12. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. AO have grossly erred by selecting certain companies which are earning super normal profits as comparable to the Appellant. 13. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. AO have gros....
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....terest u/s 234D of the Act). Necessary directions may please be given to the Ld. AO in this regard. 18. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty under section 271 (1 )(c) of the Act. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute, withdraw any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal." 3. The assessee is a private limited company which is engaged in the business of Software Development and product support services. The assessee company was incorporated on 15.05.1998 under the Companies Act, 1956 and is a wholly owned subsidiary of M/s Microsoft Ireland Capital Limited (99.99%), which is ultimately owned by Microsoft Corporation, U.S.A. The company was incorporated in India to provide computer software development services and support services to Microsoft Corporation. The company renders the services in accordance with the instructions of Microsoft Corporation. The assessee has two undertakings, one at Bangalore and another at Hyderabad. Return of ....
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....come claimed as other sources) 16,63,54,780 GROSS TOTAL INCOME 5,59,09,73,886 LESS DEDUCTION UNDER CHAPTER VIA i. Deduction u/s 80G 78,94,941 TOTAL INCOME 5,58,30,78,945 The assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide directions dated 29.09.2016 issued certain directions to the TPO. The TPO vide his order dated 15.11.2016 revised the TP adjustment from Rs. 2,54,75,79,744/- (original) to Rs. 2,14,48,19,158/- . The Assessing Officer vide Assessment Order dated 25.11.2016 assessed the income of the assessee company u/s 143(3) r.w.s. 144C of the Act at Rs. 5,18,03,18,360/-. 4. Being aggrieved by the Assessment Order, the assessee has filed present appeal before us. 5. During the hearing, the Ld. AR submitted that the identical issue in respect of transfer pricing and the corporate issue are decided in Assessment Year 2011-12 by this Tribunal being ITA Nos. 1479 & 691/Del/2016 order dated 14.09.2018. The Ld. AR submitted written background of facts as under:- "Microsoft India (R&D) Private Limited (MIRPL/ Appellant) is engaged in provision of Software Development Services (SDS) and IT enabled services (ITES). In addition to corporate ta....
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....t the patent is registered in the normal course of 'software development and coding' under complete supervision of overseas AE, who fund the full cost. It is important to note that veracity of these statements recorded by Authorities during field visits have not been doubted in the last five years from 2013. Therefore, conclusions reached to the contrary, merely based on vague suspicion, that MIRPL's activities involved something more valuable than routine software development and coding, are unjustified. Conclusion reached at paragraph 23 that Appellant's activities are not confined to coding may require reconsideration. Appellant prays for appropriate consideration of above facts in the context of present appeal. Closer look at details of 113 patents registered over the period of five years (from 2008 to 2012 - refer para 24 of Hon'ble ITAT order) submitted on record and some of which are extracted in paragraph 24 onwards would show that these involved routine processes of steps in order in development of any software. Again discarding submission (Kindly refer paragraph 29) that irrespective of success or failure of work assigned total cost is paid for by A....
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....ls would show. Both the companies are engaged in software products as noted in Tribunal order for Ay 11-12 in Appellant's own case, which is true even for Ay 12-13. Further, during Ay 12-13 there was a merger (extraordinary event) in case of Persistent (kindly refer pages 1568,1716,1719 of paper book IV). Without prejudice to Appellant's contention that TPO and DRP (refer comparable companies discussed at pages 41 to 58 of appeal set) incorrectly rejected inclusion of all such companies mentioned in the detailed chart submitted at the time of hearing also and respectfully requests for appropriate consideration for inclusion of all these companies (Appellants prays leave to not repeat the submissions in support of inclusion of each of such comparable companies as elaborated in submissions before lower authorities which are part of appeal record - in the interest of brevity), as these are involved in software development services, even if only for argument, basis as applied by TPO/DRP and Hon'ble Tribunal order for Ay 11-12 is to be applied, reference is kindly invited to financials of Mindtree (kindly refer pages 385,386,387,403,404,405 and 413 of' Annual reports bunc....
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....and four comparables to be included. The Ld. AR furthers submitted that in-fact the assessee has submitted 19 comparables to be included but at this juncture only, requesting four comparables to be included. The Ld. AR submitted that for exclusion of two comparables i.e. Infosys & Persistent are not comparable companies and also was excluded in Assessment Year 2011-12. The Ld. AR submitted that the factual position has not been changed from the earlier years of Assessment Year 2011-12. Therefore, these two comparables has to be excluded. The Ld. AR further submitted that during Assessment Year 2012-13, there was a merger which amounts to extraordinary event in case of Persistent. Therefore, both these comparables should be excluded. As regards inclusion of four comparables, the Ld. AR submitted that the assessee has given four comparables which are as under:- (i) Mind tree (ii) R.S Software (iii) Cigniti (iv) Sasken As regards Mindtree, R. S. Software, Cigniti & Sasken, the Ld. AR submitted annual reports of the said comparable companies. The Ld. AR further submitted that functions of these companies are identical to the assessee's company. 7. As regards corporate grounds....
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....parable, which has been assailed in the impugned order. 40. Having heard both the sides and perused the relevant material on record, we find from the Annual report of this company, a copy of which is available on pages 1653 onwards of the paper book, that this company is also engaged in earning revenue from Licensing of software products. This fact has also been recorded in the TPO's order noting that the revenue from software products stands at Rs. 1,285/- crore. This revenue has been generated from its product "Finacle", reference to which has been made on page 8 of the Director's Report. The extent of profit from software products, cannot be separated because of the merged expenses. In view of the fact that the total profit of this company includes profit from software development services as well as software products and there is no separate profit available of the software development services, we are unable to countenance the comparability of this company as the assessee is not engaged in licensing of any software products. We, therefore, order to exclude Infosys Technologies Ltd. from the list of comparables. (iii) Persistent Systems Ltd. 41. Though this company was....
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....underlying object of the entire exercise is to determine the arm's length price of an international transaction. Simply because a company was wrongly considered by the assessee as comparable, cannot, act as a deterrent from challenging before the Tribunal the fact that this company is, in fact, not comparable. The Special Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB) 1 has held that a company which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tribunal, if the assessee proves that the same was wrongly included. Similar view has been upheld by the Hon'ble Delhi High Court in Xchanging Technology Services India Pvt. Ltd. [TS-446-HC- 2016(DEL)-TP]. The Hon'ble Bombay High Court in Tata Power Solar Systems Ltd. [TS-1007-HC-2016(BOM)-TP] and the Hon'ble Punjab & Haryana High Court in CIT vs. Mercer Consulting (India) P. Ltd. (2017) 390 ITR 615 (P&H) have also approved similar view. In view of the foregoing discussion, we do not find any substance in the preliminary objection taken by the ld. DR. 44. Coming to the comparability or otherwise of this company, we find ....
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....ered within the overall 'Income from software development.' Details of such sub-segments are given on page 32 of the Annual report, which mainly comprise revenue from IT services at Rs. 8,783 million; from Product engineering services at Rs. 5653 million; and from Wireless services at Rs. 654 million. Obviously, 'Wireless services' cannot be considered as a part of Research and development software services provided by this company. The assessee has also considered only IT services segment of this company as comparable with the exclusion of 'Wireless services'. All the parameters, namely, rendering of research and development software services and also Product engineering services to its customers leading to the creation of patents, make this company fully comparable to the extent it earned revenues from IT services and Product engineering services, for which segmental information is available. We, therefore, direct the TPO to examine the PLI of this company from the IT services and Product engineering services and then treat the same as comparables with the segment of the assessee under consideration for the purpose of benchmarking. The impugned order is overturned to this extent.....
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....tatistical purpose. 12. As regards corporate tax grounds raised by the assessee, the Tribunal for A.Y. 2011-12 held as under: "103. Now, we take up corporate tax grounds raised by the assessee. 104. Ground no. 16 is against the addition towards realized foreign exchange fluctuation gain/loss and ground no. 17 is against the adjustment of Rs. 13,40,482/- against the opening written down value of computers towards unrealized foreign exchange fluctuation gain arising out of restatement of liability u/s 43A of the Act. Ground no. 18 is against denial of deduction u/s 10A of the Act in respect of specific additions amounting to Rs. 8,73,11,096/-. Ground no. 20 is against the taxability of rental income under the head 'Income from house property'. 105. The Assessing Officer decided the above issues against the assessee. The ld. DRP also upheld the view taken by the Assessing Officer in the draft order by noticing that similar view was taken by it on the above issues in the immediately preceding year. 106. Having heard both the sides, it is observed that the immediately preceding year came up for consideration before the Tribunal. Vide order dated 28.06.2016, the Tribunal in I....