TaxTMI 
TaxTMI 
2019 (10) TMI 1243
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.... issue arises in A.Y. 2007-08 as well involving ITA No. 550/Kol/2014 dated 05.12.2018, which stood adjudicated in assessee's favour as under: "3. Coming to ground No. 1. At the outset itself the Ld. Sr. Counsel for the assessee submitted that the issue raised in ground No. 1 of the revenue is no longer res Integra. According to him, this issue has already cropped up in AYs 2005-06 and 2006-07 and the Tribunal in assessee's own case for these Assessment Years in ITA Nos. 2222 & 2223/Kol/2010 was pleased to uphold similar action of the Ld. CIT(A) and against the same the revenue preferred an appeal before the Hon'ble High Court which has been dismissed by the Hon'ble High Court in GA No. 2314 of 2015 by order dated 08.01.2016 and thus Hon'ble High Court confirmed the order of the Tribunal. We note that the Tribunal in assessee's own case wherein the Ld. CIT(A) had deleted the addition made by the AO/TPO as per the transfer pricing adjustment made by them, was challenged by the revenue before this Tribunal for AYs. 2005-06 and 2006-07 wherein the Tribunal upheld the action of Ld. CIT(A) by holding as under: "13. We noted from factual aspects o....
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....ced resource pool with expertise in various areas of work, etc. Hence, the essential factor for awarding a service contract would always be technical and commercial expertise and experience of the assessee in handling such similar projects. The local presence of the AEs or it standalone financial or technical capabilities hardly influence the decision of the customer to sign the agreement with the AEs. The assessee stated that the possibility of a customer raising any claim for deficiency in administrative services are very remote, as they are rendered to the assessee as an internal arrangement and the customers are not affected by it. Only possibility of any customer raising a claim would be in respect of non-administrative services which are exclusively provided by ITA No. 2222 & 2223/Kol/10 ITC Infotech India Ltd. 16 the assessee irrespective of the business model. It was also emphasised that it is the assessee, which has adequate capital and technical expertise to bear the risks arising from deficiency in services, which neither 12A nor 12B possess. Thus even if a customer raises any claim on 12A/12B, such risk would be eventually passed on to the assessee. 14. There i....
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....mine whether the actual allocation of risk conforms to the contractual risk allocation' 'When analysing the economic substance of a transaction, it is necessary to examine whether the conduct of the associated enterprises over time has been consistent with the purported allocation of risk and whether changes in the pattern of behavior have been matched by changes in the contractual arrangements (emphasis added) Furthermore, in relation to contractual relationship and conduct of the contracting parties, para 5.3.2.30 states that: The conduct of the contracting parties is generally a result of the terms of the contract between them. The contractual relationship thus warrants careful analysis when computing the transfer price. Other than a written contract, the terms of the transactions may be found in correspondence and communications between the parties involved. In cases where the terms of the arrangement between the two parties are not explicitly defined, the contractual terms have to be deduced from their economic relationship and conduct, (emphasis added) It is also pertinent to mention at this juncture that the conce....
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....cumstances. In such situations, if risks are allocated to the party to the controlled transaction that has relatively less control over them, the tax administration may decide to challenge the arm's length nature of such risk allocation.... "control" should be understood as the capacity to make decisions to take on the risk (decision to put the capital at 5risk)) and decisions on whether and how to manage the risk, internally or using an external provider. This would require the company to have people - employees or directors - who have the authority to, and effectively do, perform these control functions. Thus, when one party bears a risk, the fact that it hires another party to administer and monitor the risk on a day-to-day basis is not sufficient to transfer the risk to that other party." Further, the OECD Guidelines have also discussed on the issue of "risk allocation" and "financial capacity" in para 9.29, 9.30 as follows: "Another relevant, although not determinative factor that can assist in the determination of whether a risk allocation in a controlled transaction is one which would have been agreed between independent parties in comparable c....
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.... possibility of a customer raising any claim for any deficiency in administrative services seems to be very remote as the customer is not impacted by the services which are in the nature of travel arrangements and liaising between the customer and the respondent. It is the respondent who would be impacted for any deficiency in the services provided by the subsidiaries. The only area of any probable dispute and consequential claims is with regard to non-administrative services which are being provided by the respondent under both the business models. -Claim for any deficiency in non-administrative services- The Ld. TPO, vide his order, has acknowledged the fact that the MSA very clearly envisage that the subsidiaries would sub-contract to the respondent the non-administrative services and the provider of these non-administrative services, i.e., the respondent would be fully liable to the user, i.e., customer for the same. He further submitted that it has the adequate capital and the technical expertise to bear the risk that may arise for any deficiency in the services provided to the customers. The subsidiaries do not have adequate capital or technical exp....
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....tment, we are of the view that the exercise of risk adjustment is not a simple exercise. A lot of research has been carried out in this field of economics over the years, as a result of which various theories have evolved, that have been applied across businesses to quantify the inherent business risks. However, the subject of risk evaluation and quantification has continued to be an area of extensive study and research. The assessee vide submission dated 11th October, 2009 briefly discussed one such concept in the area of risk management i.e., towards risk evaluation and quantification. In case of the assessee, there is an inherent transfer of risk by 12A/12B to the assessee vide the MSA in relation to cases where the customer contacts directly with these. AEs and there are financial claims relating to the quality of deliverables. Such a transfer of risk through contractual arrangement is a common risk management practice in commercial world and should be duly recognized. The TPO made adjustment by determining a different revenue split [15% or 13% as the case may be] from the one followed by the respondent and 12A/12B. Such an adjustment made by the TPO was without any ba....
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.... the appellant that the adjustment of TPO towards Account of Management charges is arbitrary has been dealt by the First as well as the Second Appellate Authority and a concurrent finding of fact has been recorded that the TPO in principle accepted the remuneration model of 25% revenue sharing and the same has been substantiated and justified by the documents so submitted before the authorities below. Further, the genuineness of the documents which were relied on by the authorities have not been doubted by the Department. Thus, in view of the above, we do not find any illegality and infirmity in the orders and further we are of the opinion that a concurrent finding of fact on the basis of the documents on records was recorded by the First Appellate Authority as well as the Second Appellate Authority. Accordingly, no question of law arises out of the judgment rendered by the authorities below. The appeals are devoid of merits and the same are dismissed accordingly along with the applications being GA No. 2314 of 2015 and GA No. 2318 of 2015 respectively." 5. Therefore, respectfully following the order of the Hon'ble High Court in AYs 2005-06 and 2006-0....
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....t to the year under consideration, i.e. the current year data is to be used first and not multiple year data. 4.4. However, I find force in the appellant's objection against exclusion of loss making companies. As mentioned earlier, the single year comparables identified by the appellant were having both profit and loss making companies. The TPO has eliminated only the loss making companies. No justification has been given for the same. It appears that he might have excluded loss making companies because their profitability was not considered as normal. However, no case has been made out to show that such companies were affected by any abnormal factors and loss making comparables have been summarily eliminated. It has been held in several decisions, including that by Special bench of tribunal in the case of Quark Systems P. Ltd. vs. DCIT 38 SOT 307 that a comparable cannot be rejected merely because of showing loss. Some other such decisions are in the cases of Exxon Mobil Company India P. Ltd. vs. DCIT, 15 ITR (Trib) 353 (Mum), Willis Processing Services (I) P. Ltd. vs. DCIT 30 ITR (Trib) 39 (Mum.) and Yum Restaurants (India) P. Ltd. vs. ACIT 14 ITR (Trib.) 420 (Del). ....
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....in respect of purchase of software. The appellant had claimed expenditure of Rs. 1,63,71,912/- towards purchase of software as revenue expenditure. Following his order for the A.Y. 2007-08, the assessing officer treated the same to be capital in nature. 5.1. The appellant has given following submission in the matter:- "The appellant, M/s. ITC Infotech India Ltd. during Financial Year 2007-08 relevant to AY 2008-09 has incurred the following software related expenses: Sl. Particulars Amount (in Rs.) Remarks 1 Purchase of System Software's enduring in nature Capitalised as Fixed Assets by the appellant company 3,63,49,672/- Capitalised by the Appellant Company under "Capitalised Software" of Schedule 4 of the Audited Annual Accounts - Refer Exhibit A Page 45 of the Paper Book-II Total amount of Systems Software's capitalised by The Appellant Company 3,63,49,672/- 2 Software related expenditure towards consumables, maintenance, yearly renewal charges, Annual Maintenance contracts etc. 3,54,03,415/- Revenue expenditure incurred on maintenance of softwares and other related expenditure incurred in th....
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....ure and debited to the Profit and Loss Account. These application softwares have not resulted in any enduring benefit to the Company. Hence the expenditure is not classifiable as Capital Expenditure. These were appropriately treated as revenue expenditures and were claimed accordingly for the purpose of income tax too. These application software, have had limited useful life and are used as tools of business like any other component or consumable item used for the purpose of earning revenue. The appellant company has incurred these application software expenses to fine tune its business operations thereby, enabling the running of its business more effectively, efficiently and profitably. Legal position in respect of allowability of expenses on purchase of application softwares: Appellant refer to the decision of the Hon'ble Special Bench of the Delhi Tribunal in Amway India Enterprises vs. DCIT (2008-TIOL-97-ITAT-DEL-SB) (Refer Exhibit B Pages from 90 to 124 of the Paper Book-II), laying down the tests/principles with regard to the treatment of expenditure incurred for acquisition of software either as revenue or as capital. Extract of the said decision is giv....
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....TR (AT) 183 (Bangalore) (Refer Exhibit B Pages from 128 to 155 of the Paper Book-II) which is squarely applicable in this context. The relevant portion of the judgment is extracted below for your ready reference and kind consideration please: "The test to be applied is, is it a part of company's working expenses or is it expenditure laid out as a part of process of profit earning. Is it on the capital layout or is it expenditure necessary for acquisition of property or of rights of a permanent character, possession of which is condition on carrying on a trade at all. The Hon'ble Supreme Court in the case of Alembic Chemical co. [1989] 177 ITR 377 held that the concept of payment made 'once and for all' and of 'enduring benefit' must respond the changing economic realities of the business. It is also observed that 'once for all' payment test is also inconclusive. In a given case the test of 'enduring benefit' might break down. In the light of above principle, let us examine the facts of the present case." The ITAT further observed in the above mentioned judgment of IBM that "the assessee in the course of its business acquired....
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.... even from year to year. Expenditure towards purchase of software can be capital as well as revenue in nature. There is no hard and fast rule in this regard. Rather, functional test has to be applied on nature of the software purchased on case to case basis to decide as to whether the purchase of software is in nature of capital expenditure or revenue expenditure. This is also the ratio of various decisions, including those cited by the appellant such as the decision of Special Bench of ITAT, Delhi in the case of Amway India Enterprises vs. DCIT 111 ITD 112, on this issue. With that perspective, the details of software purchased were called for from the appellant and were examined. It is seen that the software purchases included following items:- Sl. No. Vendor Particular Amount (Rs.) 1 Microgenesis Cardsoft P. Ltd. Autodesk Inventor Professional 2008 for engineering design 11,13,840/- 2 Credence Innovations (lndia) P. Ltd. Power designer data architect for data modelling 2,96,400/- 3 Dell lndia P. Ltd. Project 2007 for project management 5,14,734/- 4 Sonata information Technology Ltd. IBM Rational Software Architect Fl....
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....t last substantive ground as well the main appeal ITA No. 67/Kol/2015. 8. Next comes assessee's cross-appeal ITA No. 485/Kol/2019. It emerges at the outset the same suffers 1535 days' delay in filing. The assessee's detailed condonation petition reads that it has sought to delete section 40(a)(ii) education cess disallowance of Rs. 8,60,379/- as a business expenditure allowable u/s. 37(1) of the Act since incurred only and exclusively for the purpose of the business. Learned CIT-DR vehemently contended that the impugned 1535 days' delay in filing of the instant appeal has not been properly explained as attributable to circumstances beyond assessee's control. The taxpayer's case on the other hand is that hon'ble Rajasthan high court's judgment in Chambal Fertilizers and Chemicals Ltd. case ITA No. 52/2018 dated 31.07.2018 considered in the tribunal's order in M/s. ITC Limited vs. ACIT ITA No. 685-1267/Kol/2014 decided on 27.11.2018 held that the impugned disallowance of educational cess u/s. 40(a)(ii) is not sustainable. Hon'ble apex court's landmark decision in Collector, Land Acquisition vs. Mst. Katiji & Others (1987) 167 ITR 471,472....
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....on the basis of comparables for the relevant financial year, i.e. F.Y. 2007- 08 only. When the appellant gave such details, the TPO observed therefrom, that the comparables included loss making companies also. He excluded such companies and arrived at six comparables, whose average PLI came to 17.46%. As against that, PLI of the appellant was 11%. He accordingly made adjustment of Rs.22,20,030/-. 4.1. The appellant has given following submission in the matter:- "During the year under review, the appellant has rendered management services to I2A and 12B on an exclusive basis. This transaction was based on the following functional aspects: (a)A major portion of I3L's managerial time was spent on the business interest of I2A and 12B. Hence it was justified to recover the associated costs from the actual benefit recipient. (b)Certain top level marketing effort by the appellant's personnel also served the business interest of I2A and I2B hence, I3L was justified in receiving remuneration for the time spent. The remuneration was based on cost allocated based on the revenue generated by the appellant and its subsidiaries I2A and I2B. A mark-up ....
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....-2.69% CERTIFIED TO BE TRUE COPY pital wisd Dudam SANJAY MALLICK D.C.I.TJCircle-2(1), Kolkata of the कारà¥à¤¯à¤¾à¤²à¤¯ Document 2 The Ld. To vide show cause novice dated a Uctober, or (Please refer Appendix & Pune Number so of the Paper Book 1)ected the comarubiis sal werken by the appellant based on the multiple grur data of the enparable componius and computed arm's length inrgin for the managemeni transation after considering margin of the above comparable companies for FY 200-08 and excluding loss making comparables from the set. The single year morgie (PY 2007-08) of the above companies compared from the Pros and Capitaines database are prnetded below for your kimi onasideration: St.No. Name of Comparable Companies Database ' OP/TO Prower 17. & Chiyoda I'd 7 Agrime Consultants International Lid. CkA Management Consulting Sercions Ltd. Prowess I Prowess 16.676 . Proven Prowess T 3-34 . 429857 ' Prowess ' -3-26556 + 8 NTPC Blocvic Supply Co. Tid. Omcard Technologies Lid. Tata Sons Lt. T....
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....ons based on which the reasonableness or otherwise, of the transfer prices fixed by bie associated enterprises cue be cvaluated. In such an analysts, it cannot be said that the business and economie eunditions prevalling when the priestore fived were irrelevant. In fact the business and economic conditions prevailing in the period immedietely before the commencement of the relevant financial year are af umut inporlanen in deciding the expectations a busine man would have for the unediate future ani would therefore directi influence the prices at which such a business man wonki ve zeilling to purchase or sell goods or services. The data of the too immediately precedy years gives a clear intention of the business economic conditions prevailing immediately prior to the relevant financial year tu fact, it has the further advantage of corcing not only ce business and economic conditions of the period but is the economic onei business trends. These trends directly dueace the business . of decision-makers. I should be lod that the Tadian transfer pricing provisions are, to a large event, consis with the OECD Gaidel....
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....me af such analysis can be stretched is the time hen the appellant is realistically able to acijust its profits (through book adjustment or other ise) u inke into account any change reqnred zn align the pror level to the arm's length profit level. This findt fine wild be the point when Bu jinancial year ends, le. On y March of the financio' year. Beyond this point the appellant would not be m a realistic situation m lake commercial steps to adhere to the arm's length principie, since any possibilities of compensation cujuswatsid be exhausted , In the above contert, it is also pertinent to take cognisance of the OCD TP Guidelines. Para 5.9 of the OFCD 1995 Guidelines state. Jn considering whether documentation is miequate, u tax administration should have regard to the extent to which that aforniation reaseality could have been available to the taxpayer at the time transfer pricing was established ." Para 5.10 of the OECD Guidelines states: CERTIFIED TO BE TRUE COPY SANJAY MALLICK D.C.IT/Circle-2(1), Kolkata CVG201 Tax ministration further should not require pagers to produce documents that are not in the ....
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....e on use of Multiplo Your Data In civa of the above and considering Circular No. 12 of 2001 issued by Central Board of Direct Taxes (CBDT) which states that "While it would be nacassary to protect our tax base, there is a need to ensure that the taxpayers are not put to widable hardship in the implementation of these Regndations." We submit that conducting a fresh search/oconomic analysis based on information currently quotable but not avaišie at the time of determining the ringil price is out the intent of the Reggaentions. In his cryords, reliance is placed on the decision of the Income Tax Appellate Tribunal in the case of Philips Software Centre Private Limited -vs- ACIT(ITA No. 218(BNG)/08), where it has been bred that. CERTIFIED TO BE TRUE COPY thesath SANJAY MALLICK 0.6. Crete 211) Kekeca Code - W Document 4 TERI 122-12 153 The ?PO conducted a comperability analysis by using ula beyond the 'sperified date which was not contemporaneous and hence, is naisis was not in compliance with the provision of Rule roika) of the 11 Reles . The requirement of the rules is neo-fold: (a) The date must relate to the f....
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....ions that financial data relating to FY 0708 was not available at the point of time when the contemporaneous documentation or prepared by the appellant. The appellant has placed reliance on Ride toẞ(4) read with 1014) of the Income Lux Rules. 1962 to perform the necessary benchmarking studies to establish the arm's length nature of its transactions and finds no justifiable lean reason as to ichy the some should be disregarded so us to consider financial data relating to us for the comparable companies which was not available in the daiehuse and by the appellant at the time of preparing the contemporaneis deumentation. As per the humble contention of Ue appeilani, use of such data nou would result in on improper application of the late and would be beyond the legal mandate provided in the transfer pricing laws. In view of the above, the appellani pleads before your goolself to consider the date of the comparable companies us provided in the 7P Stuig report. Without prejudice to the above argument of the appellant, even if relevant transaction year margin for comparable companies are to be considered from the updated publicly availabi ....
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....e diminishing revenues or losses, when these companies operate aree icke and fe competition from other compurian Reems of a company ore a function of the market oymantics, the edge the company holds over other competitors , the nature of the services that are rendered by the company etc. The appellant could also like to bring to the kind attention that, the approach proposed by the fal. TPO for compung the arm's length margin after removing loss making companies fru the set of comparable companies without undertaking any analysis and citing any covent reazan, would not reflect the corrert average pro margin earned my comparable companies performing similar functions and asstaming similar risk us that of the appellant. The object of azzy enterprise is to earn profit but in ceriuin ear it could incur loss due to factors beyond its control. Non selection of lass making companies would be against the business and economic rational and the profit margin computed would refer a distorted picture. Further, the appellard would like to submit that as per the provisions of Section 92Cts) of the Act. the Ld. TPQ may ....
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.... auch hasis of which be formed that the CETE opinion com any circumstances In ali asher cases the mix of the international action should be accepted wether fother scruting." exista. (emphasis added) Further, the appellant submits that the loss making companies or as much a part and parcel of an industry as are profit making companies. The elimination of companies merely because they are loss making would result in a 2ot of companies thar wadd provide significantly higher mark-up. The appellent would the to reiterate that the arithmetic mean is a measure of central teniency and the arm's longth price takes into consideration each of the values in the normal distribution. The elimination of loss making companies would introduce skees in the set of comparables that would result in the mean being deramined to be a much higher value there who should ordinarily be the case. hermore, the appellant remuld also like to retrace that the retention of sos moking companies louaside profitable companies suas necazz out the risk prude of comparable companies. Aair, the comparable companies are full scale entrepreneur a....
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....at such comparable has inmerred extreme profits or losses. Whether or not a compu should be considered as a comparable depends upon its FAR analysis. The Hon'ble Tribunal hold that. "b her words, as a general principle, both loss meking unit and mah profit making unit ramot be eliminated from the comparables anless, there are specific reasons for eliminating the same which is other than the general russon that a comparable has incurrel loss or Jus made abnormoi profits" This, the most significant takemrays from this case is that if the super normal profit earning companies are ner rejected from being used as comparablos on cement of them earning Genormal profits, then even the foxx nuking companies should not he rejected from being used Gs comparables for the reason that they are lens making. The rest of comparability is FAR enalusis, and if a comparable unirms to FR analysis findings, den such comparables should not be rejected from being used in orm's length price determination for the roazem tha they reported Ins Further to above it needs mention that if less making companie cure excluded for the reason Tho they have reported losses, ....