TaxTMI 
TaxTMI 
2019 (3) TMI 1633
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....he Form 3CEB filed in respect of international transactions entered by the assessee with the related parties/Associated Enterprises (A.Es.), it was noticed that total international transactions by the assessee with A.Es. was more than Rs. 15 crores. Accordingly, a reference was made to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act by the AO for computing the Arms Length Price (ALP) of the international transactions. In response to the reference, the TPO vide order dt.28.10.2010 passed u/s 92CA(3) of the Act made an upward adjustment of ALP transactions aggregating to Rs. 14,73,41,167/- on account of international transactions relating to provision of Software Development Services rendering of ITEs to A.E. and rendering of sales support services of the assessee. Thereafter, AO passed draft assessment order u/s 143(3) r.w.s 144C(1) of the Act wherein he determined total income of Rs. 15,20,17,900/- by proposing addition of Rs. 14,73,41,367/- on account of transfer pricing and denying excess deduction of Rs. 29,08,298/- u/s 10A of the Act. Assessee filed objections before the Dispute Resolution Panel (DRP) against the proposed additions in the draft assessment order. After....
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....companies as comparable in relation to provision of software development service and accordingly, accepting companies having turnover greater than Rs. 125 crores. 6. Rejection of certain comparable companies identified by the Appellant in the transfer pricing study report. Erred in rejecting certain companies from the comparable set identified by the appellant in respect of international transactions pertaining to provision of software development services, IT enabled services and sales support services. 7. Accepting certain companies as comparable for FY 2006-07 in relation to provision of software development services, IT enabled services and sales support services Erred in accepting certain additional companies as comparable to the Appellant in relation to provision of software development services, IT enabled services and sales support services. 8. Following inconsistent approach for rejecting / accepting companies as comparable in relation to sales support activity of the appellant. Erred in adopting inconsistent approach of applying the functional comparability criteria while rejecting /accepting companies as comparable for the purpose of t....
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.... Section 10A of the Act on the principle of parity. 14. Computation of interest under Section 234D of the Act. Erred in computing interest payable under Section 234D of the Act on the amount of refund granted (in September 2009) by taking wrong interest rate. III Other grounds of appeal 15. Initiation of penalty proceedings under sec 271(1)(c) of the Act Without prejudice to the above grounds, even if the adjustments are sustained, the learned AO erred in initiating penalty proceedings under section 271(1)(c) without appreciating the facts that, proposed transfer pricing adjustment to the international transactions of the appellant as well as other addition are on account of difference of opinion as to application of selection criterion for selection of comparable companies, incoherent approach, interpretation of the provisions, etc. 16. Erroneous levy of interest under section 234B of the Act. Without prejudice to the above grounds, even if the adjustments are sustained, the learned AO erred in levying interest under section 234B of the Act, as applicable, on account of unanticipated additions made to the total income of the appellant on account....
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....lating to assessment year 2005-06, order dated 04.11.2015. 51. The learned Departmental Representative for the Revenue on the other hand, pointed out that if there is no question of any TP adjustment, then why the section 10A of the Act itself provides that no such deduction is to be allowed on TP adjustment. The learned Departmental Representative for the Revenue pointed out that the Special Bench in Aztec Software and Technology Services Ltd. Vs. ACIT reported in 294 ITR AT 32 followed by Pune Bench of Tribunal in ACIT Vs. MSS India Pvt. Ltd. in ITA No.393/PN/2007 , relating to assessment year 2003-04, order dated 19.05.2009 has taken a view that the ratio is squarely applicable. 52. After considering contentions of both the learned Authorized Representatives, we find that the issue in the present appeal is decided by Pune Bench of Tribunal in ACIT Vs. MSS India Pvt. Ltd. (supra). A contrary view has been taken by Mumbai Bench of Tribunal in DCIT Vs. M/s. Tata Consultancy Services Ltd. (supra). In view of the ratio laid down by the coordinate Pune Bench of Tribunal in ACIT Vs. MSS India Pvt. Ltd. (supra), we find no merit in the claim of assessee. Further, in an....
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.... the material on record. We find that the TPO while deciding the issue against the assessee has relied on the various decisions of Tribunal cited under para 10.10 of the DRP of the order. Before us also Ld AR has submitted that the issue is covered against the assessee by various decisions. In view of the foregoing, we find no reason to interfere with the order of DRP and thus these grounds are dismissed. 11. Ground No 5 is with respect to applying turnover filter of Rs. 25 crores to Rs. 200 crores as against turnover filter of Rs. 25 crores to Rs. 125 crores applied by assessee. 11.1. TPO noticed that the assessee while selecting the comparables for the purpose of benchmarking had led down criteria with turnover of Rs. 25 crores to Rs. 125 crores though the turnover of the assessee from rendering of software services was Rs. 109.11 crores. TPO did not agree with the assessee's reasoning for selecting the comparables on the basis of turnover filter laid down by the assessee. He considered the companies with the turnover between Rs. 25 crores to Rs. 200 crores to be more appropriate and based on the aforesaid filters, proceeded to select the comparable companies. Aggrieved....
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....lopment Services 109,11,51,865 TNMM 2 Rendering of ITES 3,96,74,749 TNMM 3 Rendering of Sales Support Services 1,30,24,261 TNMM 114,38,50,875 15. Rendering of Software Development Services : With respect to Software Development Services, TPO noticed that during the year under consideration assessee had rendered Software Development Services worth Rs. 109,11,51,865/- to its Associate Enterprises (AE's) and assessee had selected TNMM method as the most appropriate method to benchmark international transactions with operating profits (OP)/operating cost (OC) as Profit Level Indicator (PLI). For benchmarking the international transactions, assessee had identified 9 companies as being comparable to the assessee. Based on the weighted average margins of the 9 comparables, the arithmetic mean profit margin was determined at 15.04% as against the profit margin of the assessee at 10.15% and thus the assessee stated that its transactions with its AE's were at arm's length. TPO for the reasons given in the order found the following 7 companies selected by the assessee to be not comparable with the assessee and he....
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.... included 2 companies as comparable to assessee and held the 6 companies to be comparable. He noticed that the arithmetic mean of the operating profits of the final set of 6 comparable companies comes to 22.20% as against the operating margin of the assessee of 11.76%. He accordingly, on the basis of adjusted mean of the operating margin of the comparables, worked out the upward adjustment to the international transactions relating to ITES segment at Rs. 37.07,022/- and made its addition. 17. Rendering of Sales Support Services : With respect to Sales Support Services, TPO noticed that during the year under consideration, assessee had rendered Sales Support Services worth Rs. 1,30,24,261/- to its Associate Enterprises (AE's) and assessee had selected TNMM method as the most appropriate method to benchmark international transactions with operating profits (OP)/operating cost (OC) as Profit Level Indicator (PLI). For benchmarking the international transactions, assessee had identified 11 companies as being comparable to the assessee. Based on the weighted average margins of the 11 comparables, the arithmetic mean profit was determined at 18.05% as against the profit m....
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....co Global Systems was considered to be comparable by CIT(A) for AY 2005- 06 by noting that there was nothing in the Annual Report to indicate that the company carried out business other than development of computer software and rendering of services and that against the order of CIT(A), Revenue is not in appeal. He further submitted that Lanco was considered as comparable by TPO for AY 2008-09. He therefore submitted that Lanco Global should be considered to be a comparable company of the assessee. b) With respect to inclusion of Maars Software International Ltd as a comparable, Ld AR pointing to its Annual Accounts placed in the paper book submitted that its Auditors Report states that the Company is engaged in the activities of software development and training and does not carry any inventory. He further submitted that under Part IV of Schedule VI attached to the annual accounts, "Software Development" has been identified as the principal business activity of the Company. He further submitted that in the Profit and loss Account for F.Y 2006-07, the expenditure side includes "Software Development Expenses" as one of the heads. He further placed reliance on the decision o....
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....ad increased from Rs. 214.24 lacs to Rs. 498.88 lacs showing a growth of 133%. The operating profits turned positive to Rs. 207.41 lacs in 2007 as against loss of Rs. 44.89 lacs in 2006 and further there is steep fluctuation in margins from -44.21% (in FY 2005-06) to 34.30% (in FY 2006-07). He therefore submitted that in view of the aforesaid factual position, Informed Technologies cannot be considered to be a comparable company and for this proposition he relied on the decisions in the case of Cummins Turbo Technologies Ltd vs DDIT (ITA No 161 & 269/Pn/2013), Quark Systems P Ltd (132 TTJ 1). b) With respect to exclusion of Maple E solutions Ltd, Ld AR submitted that it cannot be considered to be a comparable to Assessee as it is functionally not comparable since it is engaged in providing voice based services (i.e. provision of call centre services) whereas the Assessee is engaged in provision of non voice based services. In support of his contention that Maple is engaged in call centre activities, he pointed to the Director's report which is placed in the paper book. He pointing to its Profit and loss account submitted that the Income is from Call centre Services". H....
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....anco Global Systems Ltd., assessee before us has demonstrated that its principal business is "Software Services", it has carried out the business of development of computer software and rendering of services. We further find that Lanco was considered to be a comparable by the TPO in Assessee's own case in AY 2008-09 and further CIT(A) in AY 2005-06 had considered it to be a comparable and Revenue is not in appeal against the order of CIT(A). We therefore agree with the contention of the Ld AR that Lanco should be considered as comparable and therefore direct the TPO to consider it as a comparable company. ii. With respect to inclusion of Maars Software International Ltd as a comparable company, before us, Ld AR with the help of the annual accounts has pointed out its principal business activity is "Software Development", it is engaged in the activities of software development and training. We further find that the co-ordinate Bench of Tribunal in the case of John Derre (supra) has held Maars Software to be in the business of software Development. Before us, Ld DR has not controverted the submissions made by Ld AR. We therefore direct TPO for the inclusion of Maars Soft....
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....uring the year under consideration and past three years. It therefore held for its exclusion. In view of the aforesaid facts, we direct the exclusion of Informed Technologies as a comparable We therefore direct TPO for the exclusion of Informed Technologies as a comparable company. ii. With respect to Maple E Solutions, before us, Ld AR on the basis of Annual Accounts has demonstrated that it is engaged in call centre activities, its income is from call centre services whereas Assessee is engaged in providing non voice based services. In such a situation, we hold that Maple E solutions cannot be considered to be a comparable company in view of functional dissimilarity and therefore direct its exclusion. 25. Before us, Ld AR has submitted that if Informed Technologies and Maple E solutions are excluded from the comparables, then the margin of the Assessee will be within +/-5% and therefore in terms of Sec.92C(2) of the Act no adjustment would be required. We have herein above held the aforesaid two companies to be not comparable and directed its exclusion. In such a situation we do not find any reason to decide with respect to the inclusion of other companies. 26. Wit....
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....hat the operations for FY 2006-07 to be quite abnormal and therefore did not reflect a normal business trend and therefore was excluded from being a comparable. In view of the aforesaid facts, we direct the exclusion of IOL as a comparable company and thus direct the TPO to exclude it from comparables. Thus, ground Nos.6 to 8 and 12 are partly allowed. 27. Ground Nos.9, 10 and the additional ground are considered together. It is with respect to computation of relief for working capital adjustment in relation to provision for software development services, provision for IT enabled services and Sales Support Services. 27.1. During the course of TP proceedings assessee had asked for working capital adjustment with respect to provision for software development services, provision for IT enabled services and Sales Support Services which was denied by the TPO mainly for the reason that the assessee had not asked for working capital adjustment in the TP study report even with respect to the comparables selected by the assessee itself. Aggrieved by the order of TPO, assessee carried the matter before DRP who directed the AO/TPO to grant working capital adjustment. 28. Before us, Ld A....
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....adjustments to the operating margins of the comparables vis-a-vis the assessee. It was further submitted by the Assessee that it is a risk mitigated entity whereas the comparable companies were operating in a high risk exposed environment as they were not cost protected. The TPO rejected the claim of risk adjustment for the reasons stated in his order. Aggrieved by the order of TPO, assessee carried the matter before DRP who vide para no 17.3 upheld the order of TPO. Aggrieved by the order of DRP, assessee is now before us. 32. Before us, LD AR reiterated the submissions made before TPO/DRP and further submitted that Hon'ble DRP had not considered the submissions of the assessee and had merely brushed it aside by relying on the order of TPO. He submitted that since the assessee was pricing its services at Cost plus mark-up and the services were to its associate enterprises, there was no risks taken by the assessee. On the other hand the comparable companies selected are normal risk bearing entities. He submitted that the risk adjustments are as per the methodology prescribed by the various Benches of the Tribunal. He further submitted that on identical facts in assessee'....
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....r the methodology prescribed by Delhi Bench of Tribunal in M/s. Sony India (P) Ltd. Vs. DCIT (2008) 114 ITD 448. In view of the provisions of section 10B of the Act, we restore this issue back to the file of Assessing Officer / TPO to compute risk adjustment after affording reasonable opportunity to the assessee to work out and justify to the satisfaction of Assessing Officer, the risk adjustment it would be entitled to. We hold so. The issue raised is thus, allowed for statistical purposes." 34. Before us, no distinguishing feature in the facts of the case under consideration and that of earlier years has been pointed out by Revenue. Further, Revenue has also not placed any material to demonstrate that the order of the Tribunal in Assessee's own case of AY 2006-07 has been set aside/ stayed/ overturned by higher judicial forum. In view of the aforesaid facts and following the same reasoning of the coordinate Bench of tribunal in Assessee's own case for AY 2006-07 and with similar directions, we restore the issue back to the file of AO/TPO to grant the risk adjustment in accordance with law. Needless to state that AO/TPO shall grant adequate opportunity of hearing to ....
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....ervices outside India in foreign currency of Rs. 1,22,88,308/- from 'export turnover' for working out the exemption and thereafter worked out the exemption u/s 10A of the Act at Rs. 16,31,68,953/- as against the assessee's claim of Rs. 16,60,77,251/- and thus disallowed the excess claim to the extent of Rs. 29,08,298/-. Aggrieved by the order of AO, assessee carried the matter before DRP, who vide order dt.29.09.2011 upheld the order of AO by observing as under : "19.3 Certain expenses such as freight, tele-communication charges etc. have been specifically excluded from "Export Turnover" under clause III of the Explanation (2) to section 10B. If the Legislature intent where to effect exclusion of identical amounts from "Total Turnover", then the same would have been specifically provided for / mandated in this section. That is not the 'case. In the circumstances, doing so would amount to imputing and interpretation to the statutory provisions where such interpretations are not warranted' in the view of the provisions being unambiguous. No doubt, in certain cases courts have held for exclusion of certain items of receipts both from the numerator as well ....
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....t turnover' but the same was not excluded from 'total turnover'. We find that CBDT vide Circular No.4/2018 dated 14.08.2018 in para Nos.5 and 6 has clarified as under : "5. The issue has been examined by the Board and it is clarified that freight, telecommunication charges and insurance expenses are to be excluded both from "export turnover" and "total turnover", while working out deduction admissible under section 10A of the Act to the extent they are attributable to the delivery of articles or things or computer software outside India. 6. Similarly, expenses incurred in foreign exchange for providing the technical services outside India are to be excluded from both "export turnover" and "total turnover" while computing deduction admissible under section 10A of the Act." In view of the aforesaid CBDT's Circular, which is binding on Revenue authorities, we are of the view that the aforesaid expenses have to be excluded both from 'export turnover' and 'total turnover' while computing deduction u/s 10A of the Act. We thus, direct accordingly. Thus, the ground of the assessee is allowed. 39. With respect to ground No.14, which is....