TaxTMI 
TaxTMI 
2019 (3) TMI 1633
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....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 considering the objections of assessee to the ....
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...., 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 the appellant's sales support activity. 9. Erred in computing relief for working capital adjustment in relation to prov....
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....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 of transfer pricing adjustment and corporate tax related additions." 3. Assessee thereafter vide letter dt.11.12.2012 raised an additional ground which reads as under: "On the facts and in the circ....
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....0A 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 any case, the provisions of the Act are clear in not allowing any deduction on any TP adjustment made under sections 10A and 10B of the Act. Where the section itself provides that no deduction under section 10A of the Act is to be allowed o....
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....d 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 by the aforesaid action of TPO, assessee carried the matter before DRP who vide para 11.1 of the order upheld the action of TPO in enhancing the upper filter limit for selecting comparables at Rs. 200 crores. Aggrieved by the order of AO/DRP, assesse....
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....ices, 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 thus excluded the following 7 companies. * Aztecsoft Ltd, * Lanco Global Systems Ltd, * Goldstone Technologies Ltd, * Maars Software International Ltd, * Melstar Information Technologies Ltd, * Orient Information Technology Ltd, * Quintegra Sol....
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....ut 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 margin of the assessee at 10.34%. 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 5 companies selected by the assessee to be not comparable with the assessee and thus excluded them: * Cyber Media Events Ltd, * Educational Consultants Ltd, * Electronica Machine Tools Ltd....
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..... 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 of Pune Tribunal in the case of John Deere India Ltd Vs ACIT (ITA no 1319/PN/2011) the copy of which is placed in the paper book. He therefore submitted that Maars Software International Ltd be considered to be a comparable company. c) With respect to inclusion of Quintegra Solutions Ltd as a comparable, Ld AR pointing to its Annual Accounts placed in the paper book submitted that the Company is int....
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....ompany 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". He also placed reliance on the decision of Pune Bench in the case of Cummins Turbo Technologies Ld Vs DDIT (ITA No 161 & 269/Pn/2013) and the decision in the case Lubrizol Advanced Materials India P Ltd Vs DCIT (ITA No 2811/Ahd/2011). The Ld AR 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 s. 92C(2) of ....
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.... 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 Software to be a comparable company. iii. With respect to the inclusion of Quintegra Solutions as a comparable company, before us Ld AR with the help of its Annual accounts has demonstrated that it is in the business of providing Software Development Services, Software Development has been identified as its principal business activity. We further find that in the case of John Derre (supra) for AY 2007-08 the co-ordinate Bench of tribunal has held it to be engaged in....
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....e 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. With respect to inclusion and exclusion of comparables with respect to Sales Support services, before us learned AR has inclusion of Cyber Media Events Ltd, Educational Consultants India Ltd, NTPC Electric Supply Co Ltd and exclusion of ICRA Online Ltd (IOL) from the final list of comparables. i. With respect to inclusion of Cyber Media Events Ltd, Educational Consultants India Ltd, NTPC Electric Supply Co Ltd, the Ld AR has not demonstrated as to how the functions and activities can be compared wi....
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....o 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 AR submitted that pursuant to the directions of DRP, AO had granted working capital adjustment but there is calculation error in the working by the AO/TPO. He submitted that in relation to software development services, AO/TPO worked out the margins at 24.48% as against 20.92% being the margins of comparable companies worked out by the assessee. Similarly while working the working capital adjustment in relation to provision of IT enabled services, the AO/TPO worked out the margins at 22.20% as against 19.65% being t....
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....e 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's own case for A.Y 2006-07, the Co-ordinate Bench of Tribunal for A.Y 2006-07 has in principle granted the risk adjustment to the assessee but for quantification the matter was remitted back to AO/TPO. He pointed to the relevant para of the decision and submitted that since there no change in the facts in the year under consideration and for AY 2006-07 then following the order of tribunal for AY 2006-07, the assessee be granted risk adjustment. Ld DR on the other hand supported the order of TPO and DRP. 33. We have hear....
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....ature 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 the assessee. Thus, the ground of the assessee is allowed for statistical purposes. In line with our directions hereinabove with regard to each segment, the AO/TPO shall determine ALP of each of the segment of international transactions. 35. Ground No.13 is with respect to computation of Sec.10A deduction by reducing telecommunication expenses and foreign currency expenses from export turnover. 35.1. During the course of assessment proceedings, AO noticed that assessee had incurred expenditure of Rs. 1,22,88,308/- in foreign exc....
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....ges 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 as the denominator. Exclusion from the sales tax and excise duty from export turnover for the purpose of section 80HHC of the I.T. Act, 1961 is a case in point. However, it is pertinent to mention that such issues had to be decided on interpretation as the statute did not specifically provide for the exclusion or inclusion of receipts. In the present case, exclusion of telecommunication charges from export turnover has been specifically provided whereas exclusion thereof from total turnover has not been specifically provided. Therefore, as alread....