TaxTMI 
TaxTMI 
2019 (1) TMI 1136
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....60 as against a returned income of Rs. 2,93,43,42,780. 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 be....
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....ies having employee cost less than 25 percent of the operational cost as a comparability criterion for the Impugned Transaction. 9. That on facts and 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 sel....
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....RP in the earlier years. 17. That on the facts and in law, on disposal of this appeal material adjustment would be required in computing total income, tax, interest u/s 234B of the Act and refund added (along with Interest 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 s....
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....AIN i. Long Term Capital Gain : NIL ii. Short Term Capital Gain : 2,91,118 2,91,118 INCOME FROM OTHER SOURCES (As per revised return of income minus Rental income claimed as other sources) 16,63,54,780 INCOME FROM OTHER SOURCES (As per revised return of income minus Rental income 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....
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....holding meetings. Such aspects remained out of consideration in said order. It is respectfully submitted that such statements cannot be discarded/lightly ignored as "one side of the story" -kindly refer paragraph 10 of said order of Tribunal. APA statements clearly and unequivocally explain that there is no 'research' involved and that 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 ....
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..... Especially so as it is not even denied that MIRPL role is miniscule part of total product development as it may be involved in a feature or a part of it as assigned by AE. Without prejudice to above position, Infosys (kindly refer pages 1452, 1459 of paper book IV) and Persistent cannot be comparable companies even applying above criteria as a reference to audited financials 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 submission....
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....cision on this issue. It is respectfully submitted that though this case law was brought to notice of Hon'ble Tribunal, the same does not find consideration in order for Ay 11-12, hence this prayer. The other grounds of appeal are consequential and Appellant prays for suitable directions." 6. The Ld. AR submitted that the assessee in the present year also challenging two comparables to be excluded 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....
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....arables. The assessee objected to such inclusion by contending, inter alia, that it is engaged in noteworthy R&D activities apart from having significant intangible assets and exceptionally high turnover. The assessee also submitted that this company is functionally not comparable as it is also having revenues from software products. The assessee's objections have been recorded on pages 80-82 of the TPO's order. Not convinced, the TPO held this company to be comparable, 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 t....
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....ecause a company was wrongly chosen by the assessee as comparable, cannot tie its hands from contending before the Tribunal that such a company was wrongly considered as comparable which is, in fact, not. There is no qualitative difference between a situation where an assessee claims that a wrong company inadvertently included for the purpose of comparison should be excluded and the situation in which the Revenue does not accept a particular company chosen by the assessee as comparable. The 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 Xc....
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....lopment which offers innovative solutions to clients and also fosters R&D within all business units to create intellectual property in the form of re-usable components, frameworks, etc., which help drive correct productivity." On next page of the Annexure to the Directors' Report, a list of patents registered either in India or the USA has been appended, which are 19 in number. Profit & Loss of this company shows 'Income from software development' at Rs. 15,090 million. This company has three sub-segments which are covered 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 enginee....
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....e held that TPO has rightly excluded this comparable company. As regards, Cignity Technologies Ltd. and Sasken Communication Technologies Limited (Software services segment) both of the comparables involved in R&D activities for software development services in the present Assessment Year whereas the assessee company is not involved in R&D activities which can be seen from the TP study of the assessee company. Therefore, we held that TPO has rightly excluded these comparable companies. 11. Thus, Ground Nos. 3 to 14 are partly allowed for statistical 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 ....