TaxTMI 
TaxTMI 
2019 (6) TMI 1090
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....hapter x of the act and further in disallowing software license fee and management fees by ignoring to consider relevant and complete facts, hence the same deserves to modified and the additions made to returned income deserve to be deleted being contrary to law, unjustified and bad in law. 1.1 That, on facts and circumstances of the case and inlaw, while passing the assessment order, the learned AO has erred in assessing the total income of the Appellant at Rs. 14,91,21,844 as against returned income of Rs. 4,91,40,840/-. 2 Grounds relating to Corporate Tax Matters: That, on the facts and circumstances of the case and in law: 2.1. The Ld. AO/DRP erred in disallowing Rs. 1,49,65,459/- as capital expenditure.; 2.2. Ld. AO/DRP erred in holding that expenditure of Rs. 1,99,53,945/- was of nature and completely failed to appreciate the real and relevant facts. 2.3. Without prejudice to our contentions that the aforesaid expenditure is reverse nature, the Ld. AO has failed to provide us with the depreciation on capitalization of software license fees in earlier years. 2.4. Ld. AO/DRP erred in disallowing valid claim of Appel....
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....requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price. 3.6. Ld. AO/DRP/TPO have failed to make appropriate adjustments to account for differences in risk profile of the Appellant and further erred in considering certain expenditure as operational/ nonoperational in nature without valid basis. 3.7. Ld.AO/DRP/TPO has erred in disregarding elaborate documentation and evidence submitted as part of assessment proceedings and assuming that 'no benefit' has conferred to the Appellant and that there was no need for international transaction pertaining to availing of intra-group services from its AE. 3.8. AO/DRP/TPO has erred in applying the Comparable Uncontrolled Price CUP") method and determining the ALP of the international transaction pertaining to availing of intra-group services as 'NIL' based on extraneous considerations and by not appreciating the material on record. 3.9. Without prejudice to our ground that payment for intra-group services should not be disallowed, the Ld. AO/DRP/TPO have erred in not excluding management fees while computing the operating margin of the assesse....
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.... provide us with the depreciation on capitalization of software license fees in earlier years. 2.4. Ld. AO/DRP erred in disallowing valid claim of Appellant on relevant and unjustified considerations without appreciating true and complete facts. 2.5. The Ld AO / Hon'ble DRP has erred in holding that management fees of Rs. 9,79,877 incurred by Appellant towards advances and debts written off during the captioned year. 2.6. Without prejudice to the grounds above, the Ld. AO has failed to grant us the foreign tax credit of INR 1,24,96,695/- claimed by the appellant in the return of income. 3 Grounds relating to Transfer Pricing Matters: That, on the facts and circumstances of the case and in law: 3.1. Ld. A0/DRP/TPO has erred in making an addition of Rs. 4,91,32,078 under section 92CA of the Act to the total income of the Appellant on account of adjustment in the arm's length price ("ALP") of the international transactions, pertaining to provision of software development services, provision of software deployment services and availing of intra-group services, entered into by the Appellant with its associated enterprises ("AEs"). 3.....
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.... erred in not excluding management fees while computing the operating margin of the assesse in respect of software development services and software deployment services, thereby adopting position contrary to previous assessment years. 4. The Ld. AO has erred in charging interest under section 234A and 234B of the Act. 5. The Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal." It is observed from records that A.Ys under consideration have similar facts, and there is no change in functional profile of assessee. Further A.Y. 2013-14 is a stay granted matter and, therefore, we take up assessment year 3013-14 first. A.Y.2013-14 2. Brief facts of case are as under Assessee filed its return of income on 29/11/13 declaring total income of Rs. 8,87,27,609/-. The case was selected for scrutiny and subsequently, statutory notices were is....
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....eceipt of such services for which payment has been made to AE. Ld.TPO after verifying all details filed by assessee, proposed adjustment of Rs. 4,91,32,078/- in respect of international transactions entered into by assessee. 3. Aggrieved by proposed adjustment, assessee filed objection before DRP, DRP issued certain directions to Ld.TPO regarding adjustment proposed. 4. On receipt of directions issued by DRP, Ld.TPO again passed an order under section 92CA (5) wherein, adjustment was made as under: S. No. Description Amount - Rs. 1. Software Development Services 30,53,721 2. Interest on Receivables 4,60,78,357 Total Adjustment 4,91,32,078 Ld. AO thereafter issued notice to assessee regarding software license fees paid to AE amounting to Rs. 1,85,19,216/-. Upon going through details filed by assessee, Ld.AO rejected contentions of assessee and disallowed expenditure claimed. However, Ld.AO granted depreciation at 25%. 4.1. Ld.AO also observed that assessee had shown amount of Rs. 9,79,877/- on account of advances and written off under the head 'other expenses' in P&L account. He accordingly called for assessee to provide deta....
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....of the invoice value was the obligation of the assessee ab initio without which it could not have procuced the licence of ENTERPRISE suite for sale in India. This amount can be loosely characterized as cost of goods transferred to the customers in India, which has necessarily to be allowed as a revenue expenditure. We, therefore, over turn the impugned order on this score and direct the deletion of addition of Rs. 67.52 lacs made by the Assessing Officer." 7.1. It has been submitted by both parties that facts and circumstances of this issue are similar with that of Assessment Year 2007-08 relied upon by Ld.Counsel. 7.2. Ld.CIT DR placed reliance upon orders of authorities below. However, could not controvert aforestated observations by this Tribunal in immediately preceding assessment year in assessee's own case. 8. We have perused submissions advanced by both sides in light of records placed before us. 8.1. It is observed that assessee made payment of Rs. 1,85,19,216/- for software licenses purchased from parent entity. Ld.AO disallowed, considering it to be capital expenditure, and provided corresponding depreciation at 25%. On perusal of order for assessment year 200....
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....i) of the Act. 10.2. We are inclined to allow claim of assessee and delete addition made by Ld.AO to extent of Rs. 8,03,982/-. 10.3. Accordingly this ground raised by assessee stands allowed partly. 11. Ground No. 3 are in respect of transfer pricing adjustments made by Ld. TPO. 11.1. Ld.Counsel submitted that following are transfer pricing adjustment disputed by assessee in these grounds: software development services - Rs. 30,53,721/- interest on receivables - Rs. 4,60,78,357/-. 11.2. Ground No.3.1-3.8 are in respect of adjustment made to arm's length price of international transaction pertaining to provision of software development service segment. 11.3. Ld.Counsel submitted that Ground No. 3.1 is general in nature and therefore do not require any adjudication. 11.4. Ground Nos. 3.2-3.8 are in respect of rejecting economic analysis undertaken by assessee, rejecting comparables selected by assessee and including certain companies which were functionally dis-similar to that of assessee. He submitted that Ld.TPO for year under consideration disputed arm's length determination by assessee under software development service segment. 11.5. He submit....
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.... submitted that assessee seeks to exclude only 2 comparables which has been included by Ld.TPO as under: * Infosys Ltd * Larsen and Toubro Infotech Ltd (a) Infosys Ltd. It has also been observed that this company was owning brand and having substantial intangible assets which cannot be held to be suitable comparable for assessee who was only providing software deployment services. It has been submitted that functions of assessee, assets and risk profile has not undergone any change for the year under consideration. Ld.Counsel has also submitted that this company is not functionally comparable to assessee inasmuch as, it is also engaged in software development services and generate substantial revenue from the sale of its own products. Ld. counsel placed reliance upon the decision of CIT vs. Agnity India Technologies Pvt. Ltd in ITA No. 1204/Del/2011, wherein this Tribunal vide order dated 10/07/11 upheld exclusion of this company from list of comparables, after taking into consideration its operations as full-fledged risk taking enterprise in diversified field such as application design, development, re-engineering and maintenance integration etc....
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....ear under consideration, because of which, comparability cannot be drawn. We therefore, respectfully following Hon'ble Delhi High Court, direct Ld.TPO to exclude this comparable from the list. Accordingly this ground raised by assessee stands allowed. 13. Ground no.3.9-3.11: He submitted that assessee benchmarked international transaction of receipt of intra-group services by aggregating same with other international transaction for which Ld. TPO was of opinion that sufficient and contemporaneous documentary evidence to show that services have actually been received in respect of each segment was not furnished by assessee. He placed reliance upon order dated 15/03/19 passed by this Tribunal for assessment year 2011-12 in assessee's own case wherein it has been held as under: "8. From the aforementioned chart, it can be seen that the management fee amounting to Rs. 3,57,03,763/- has been apportioned proportionately amongst the segments. At this juncture, it would be pertinent to mention that the management fee apportioned to the segment software as margin shown under this segment has been accepted by the TPO, as no adjustment has been made in respect of this segmen....
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....r submitted that services received from AE for which payment has been made by assessee, is based upon agreement entered into between assessee and Aircom UK, which is placed at page 398-423 of paper book Volume 3. Ld. CIT DR thus submitted that agreement does not categorise services rendered by AE under each of 4 segments. He submitted that apportionment of services under each Segment is not as per the agreement and therefore aggregation of services received from AE cannot be done with services provided by assessee to its AE under these 4 separate segments. Further Ld.CIT-DR placing reliance on services received by assessee from AE as described in the agreement submitted that, none of IGS received could be linked with any of the segment. He thus submitted that Ld.TPO was right in holding that, assessee failed to provide contemporaneous documentary evidence to establish kinds of services rendered by AE under each segment. He also submitted that IGS has been rendered by assessee under separate agreement and payment made by assessee is as per terms of agreement. He submitted that this itself categorises IGS to be an independent International Transaction which has been rightly bench mar....
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....such method was so selected, and how such method was applied in each case; 14.4. It is observed from TP study that assessee has been provided with following services and based upon certain allocation keys, management fees paid has been allocated amongst various subsidiaries of Aircom, UK: S. No. Nature of service Quantum (in GBP) Basis of allocation Percentage 1. IT 177,786 IT People splits 31% 2. Finance 33,526 Turnover 6% 3. Sales & Marketing 34,160 Turnover 6% 4. Service solutions 40,000 Turnover 6% 5. General Management 53,554 Turnover 6% 6. Human Resources 24,946 Turnover 6% 7. Legal 1 2,757 Turnover 6% 8. Insurance 11,091 Turnover 6% 9. Project Executive 23,264 Turnover 6% 10. Computer Licensing 155,129 IT Licences and products 27% Total 566,213 100% Thus, it can be inferred from above that Aircom UK (AE) allocated its remuneration on percentage basis in respect of each services rendered by it to all its group concerns. And based upon the above, Aircom(UK) entered....
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.... service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. According to the above provisions following principles emerge:- i. An international Transaction is entered in to between two or more associated enterprises for jointly acquiring or developing some property or for obtaining services. ii. The parties to transaction enter in to mutual agreement or arrangement to share cost or expenses incurred or to be incurred in respect of joint property. iii. The cost or expenses incurred should be in connection with a benefit or services of facility provided or to be provided to any one or more of such enterprise. The expectation of mutual benefit is important consideration for the acceptance of arrangement for pooling of resources by the enterprises. iv. The enterprises would require that each participant‟s proportionate share of the contribution is consistent with the proportionate share of ....
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....s the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an Assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an Assessee and what is not. An Assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question Assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dress....
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....the volume and quality service and that such costs are comparable. When commensurate benefit against the payment of services is not derived, then the Transfer Pricing Officer is justified in making an adjustment under the arm's length price." 14.11. Placing reliance upon aforestated decisions, we are of considered opinion that for these services, assessee has to demonstrate and satisfy Evidence Test or rendition test and benefit test, as envisaged u/s 92 (2) of the Act, and that, services provided by AE are neither duplicative nor shareholder's activity. Ld. AO/ TPO is then directed to determine Arm's length price of these services based on documents submitted by assessee by determining "most appropriate method‟ and Comparability analysis. Accordingly we set aside this issue to Ld. AO. 15. Assessment year 2012-13 ITA No. 1956/Del/2012 15.1. Brief facts of the case are as under: Assessee filed its return of income of Rs. 4,91,40,840/-, on 30/11/12. Case was selected for scrutiny, and notice under section 143 (2) along with questionnaire, and notice under section 142 (1) was issued to assessee. In response to statutory notices, representative of assessee appe....
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....oftware (India) Ltd. Accepted. 7. Silverline Technolgoies Ltd. Different functional profile. Hence rejected. 8. Cherrytec Intelisolve Ltd. Different functional profile. Hence rejected. 9. Cigniti Technologies Ltd. (formerly known as Cigniti) Accepted. 10. Mindtree Ltd. (segmental) Accepted. 15.5. Ld.TPO on analysis of the same, selected following comparables from the list submitted by assessee: Sl. No. Name of the Company 1. Acropetal Technologies Ltd. (segmental) 2. Akshay Software Technologies Ltd. 3. R.S.Software (India) Ltd. 4. Cigniti Technologies Ltd. (formerly known as Cigniti) 5. Mindtree Ltd. (segmental) 15.6. At the conclusion of exercise of selecting list of comparables, following were final list of comparables proposed to be used by Ld. TPO: Sl. No. Name of the Company OP/OC (%) 1. Acropetal Technologies Ltd. (segmental) 65.92 2. Akshay Software Technologies Ltd. 7.77 3. R.S.Software (India) Ltd. 15.43 4. Cigniti Technologies Ltd. (formerly known as Cigniti) 8.28 5. Mindtree Ltd. (segmental) 19.19 6. Evoke Technology ....
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....ti Technologies Ltd. (formerly known as Cigniti) 8.28 5. Mindtree Ltd. (segmental) 19.19 6. Evoke Technology 11.57 7. E-Zest Solution 17.51 8. Infosys Ltd. 42.15 9. Larsen & Toubro Infotech Ltd. (seg.) 27.16 10. Lucid Software Ltd. 11.10 11. Persistent Systems Ltd. 26.92 12. Sankhya Infotech Ltd. 5.68 13. Sasken Communication Technolgoies Ltd. 14.58 14. Spry Resources Pvt.Ltd. 33.59 15. Tata Elxsi 14.32 16. Thirdware Solution Ltd. (Overseas segment) 11.10 17. Zylog Systems Ltd. 33.01 Average 21.49 Ld.TPO thus proposed adjustment of Rs. 1,87,73,526/-, under this segment. 17. Intragroup services Ld.TPO issued notice to assessee to furnish details in respect of services received by assessee from its AE. After considering submissions advanced by assessee, Ld.TPO computed the arm's length price of alleged services at 'nil' on application of CUP and proposed adjustment of Rs. 1,99,53,945/-, in hands of assessee. 18. Aggrieved by proposed adjustment, assessee raised objections before DRP who agreed with view expressed by Ld.TPO. 18.1.....
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.... not functionally similar to that of assessee under the software deployment service segment. 25.1. He submitted that assessee under Software Deployment Service Segment, provides personnel to other AEs on requisition made by Aircom UK. He submitted that authorities below included comparables, without considering functional profile of assessee, and wrongly included comparables that were performing contract Software Development Services. Ld.Counsel alleged inclusion of following comparables for determining arm's length price of international transaction under Software Deployment Service Segment: * Mindtree Ltd * E-Zest Solutions Ltd * Infosys technologies Ltd * Larsen and Toubro Infotech Ltd * persistent systems Ltd * spray resources private limited * Zylog systems Ltd 25.2. Before undertaking comparability analysis, it is sine qua non to analyse functions performed, assets owned and risks assumed by assessee under software deployment service segment. (A) Functions: In TP study, it has been submitted that under this segment, employees of assessee are sent outside India for purposes of software deployment. Asses....
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....n cost plus basis. It has been submitted that it is the AEs which are indirectly exposed to this risk for Indian operations. (c) Service liability risk: This risk arises when assessee fails to perform project as expected or stated standards. It has been submitted that in case of any rework due to test failure and quality issues, charges are borne by assessee, however, in case of re-work since assessee is remunerated on cost plus basis, service liability risk of assessee is nil. Thus in TP Study, assessee has been characterised as a routine service provider that assumes limited risk under this segment. 26. Based upon the above FAR analysis, we shall now undertake comparability of assessee with that of comparables disputed hereinabove. 26.1. Mindtree Ltd It has been submitted that this comparable is functionally different with that of assessee and is engaged in provision of comprehensive range of services and software solutions. Ld.Counsel submitted that this company also undertakes significant research and development activities and owns patents in respect of the same. Further during year under consideration, this company underwent a process of amalgamation. ....
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....eas work carried out by assessee under this segment is simple deployment of employees to the customers on request from its AE's. 27.4. We therefore do not find any reason to include this comparable as they are functionally dissimilar with each other, and cannot be compared in terms of risks as well as assets owned. Accordingly we direct this comparable to be excluded from the finalist. 28. Infosys Ltd Ld. Counsel submitted that annual report of this comparable has been placed at page 1340 of paper book volume 3 and it is functionally dissimilar with that of assessee as it is engaged in R&D activities, owns significant intangible assets. It has also been submitted that this comparable has exceptionally high turnover. Ld. Counsel placed reliance upon assessee's own case for assessment year 2008-09, wherein this comparable has been excluded being functionally dissimilar with that of assessee under this segment. He also placed reliance upon the decision of this Tribunal in case of Alcatel Lucent India Ltd in ITA No. 1112/del/2017 which has been approved by Hon'ble Delhi High Court in ITA No. 515/2017, Agilis information technologies international Private Limited (supra), Aj....
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....T DR though objected for its exclusion, however, could not controvert regarding unavailability of segmental data. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that Hon'ble Delhi High Court in case of Saxo India Pvt.Ltd., (supra) rejected this comparable for nonavailability of segmental data. Further year under consideration Ld.Counsel submitted that segmental data is are unavailable for year under consideration, because of which, comparability cannot be drawn. We therefore, respectfully following Hon'ble Delhi High Court, direct Ld.TPO to exclude this comparable from the list. 30. Persistent systems Ltd (SCG) & Zylog systems Ltd (SCG) It has been submitted by Ld.Counsel that these comparables were excluded by this Tribunal in assessee's own case for assessment year 2011-12 by observing as under: "21. The Profit and loss account at page 1005 of the paper book shows that under the head 'Income', sale of software services and products is shown at 6101.27 million and schedule 11 which gives details of sale of software services and products is devoid of any segmental reporting. For our detailed reaso....
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....e considering the comparable Persistent Systems Solution Ltd are also applicable in toto here also." 30.1. On the contrary Ld.CIT DR placed reliance upon observations of authorities below. 30.2. We have perused submissions advanced by both sides in light of records placed before us. 30.3. It is observed that functions performed by assessee and that these comparables for assessment year 2011-12 and 2012-13 are similar and identical and has not been disputed by both parties. Under such circumstances activities carried on by these comparables has been held to be functionally dissimilar with that of assessee in assessee's own case for preceding assessment years. We therefore do not wish to differ from the aforestated view taken by this Tribunal as there is nothing brought on record to establish a new fact that could lead to a deviation. 30.4. Respectfully following the same, we direct ld.TPO to exclude theses comparables from the finalist. 31. Spry Resources Pvt. Ltd. : The Ld. AR submitted that the audited financial statement for the Financial Year 2011-12 is not available. 31.1. The Ld. DR relied upon order of the TPO and the DRP. 31.2. We have heard both part....