TaxTMI 
TaxTMI 
2020 (2) TMI 347
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....vices Private Limited ("GSSPL" or the "Appellant"), are not in accordance with the law, made in violation of the principles of equity and natural justice and are contrary to the facts and circumstances of the present case. 2. Adjustment under section 92CA of the Act 2.1. The Honourable DRP and the Learned AO/TPO have erred, in law and on facts, in making an adjustment of INR 154,43,05,770, with respect to the international transactions of rendering Information Technology Enabled Services ("ITES") and Software Development Services ('SWD'), to the taxable income of the Appellant and holding that the said international transactions were not at Arm's Length Price ("ALP") as defined under section 92F(ii) of the Act. 2.2. The Honourable DRP and the learned AO/TPO have erred in law and on facts in rejecting, without appropriate reasons, the detailed benchmarking analysis conducted by the Appellant and embarking on a fresh search for comparables with respect to the SWD and ITES segment with modified filters. 2.3. The Honourable DRP and the learned AO/TPO erred in fact and in law in determining the Arm's Length Price ("ALP") by adopting the financial data....
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....ppropriate working capital and risk adjustments to the margins of the comparable companies, 2.8. The Honourable DRP and the learned AO/TPO have erred in law by relying upon the information not available in public domain while carrying out the benchmarking analysis under the Act. 3. Other TP Grounds . 3.1. The Honourable DRP and the Learned AO/TPO erred in law and on facts in upholding the arms length margin arrived at by the Learned TPO by considering the lower range of 3 percent from the mean margin as allowed under the Act and the Rules. 4. Disallowance under section 14A of the Act 4.1. Then Honourable DRP has erred in law and on facts in upholding the disallowance of Rs. 2,01,750 under section 14A of the Act read with Rule 8D of the Rules in connection with the investment of funds largely made in its group companies. 4.2. The Honourable DRP and the Learned AO have erred in law and on facts in disallowing an amount of Rs. 2,01,750 under section 14 A of the Act by mechanically applying Rule 8D when there is no basis to reject the Appellant's claim that no expenditure was incurred for earning exempt income . 4.3. The Ho....
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..../demand draft),the date of payment, the transaction reference/demand draft number and the amount of payment along with the extract of the bank statement; and iii. Details of TDS on the bonus pay-out along with a copy of the TDS challan evidencing the payment of TDS to the Government authorities. 7.Disallowance of provision for expenses under section 40(a)(i)/(ia) of the Act on account of non-deduction of tax at source pertaining to 'other payables' 7.1 The Honouralbe DRP and Learned AO have erred in law and on facts in disallowing an amount of Rs. 5,91,20,000 under section 40(a)(i)/(ia) of the Act. 7.2.The Honouralbe DRP and the Learned AO have erred in law and on facts in disallowing an arbitrary amount equal to 10 percent of the 'other payables'as appearing in Note 3.5 of the financial statements of the Appellanty, under section 40(a)(i)/(ia) of the Act. 7.3. The Honourable DRP and the Learned AO have erred on facts in holding that the entire amounts appearing in 'other payables' are provisions for expenses created at the end of the year, even though the Appellant had submitted the reconciliation of the said payables into provisions cr....
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....ief facts of the case are as under: 2. Ld.AO observed that assessee is a company engaged in the business of export of software development and IT enabled services. Assessee filed its return of income for year under consideration on 29/11/14 declaring total income of Rs. 3,39,78,38,220/- under normal provisions of the act and Rs. 2,88,08,15,284/- under MAT. The case was selected for scrutiny and notice under section 143 (2) and 142 (1) of the Act were issued. In response to statutory notices, representative of assessee appeared before Ld.AO, and filed books of account and other details as called for. 2.1. Ld.AO observed that during the year under consideration assessee entered into international transactions with its associated enterprises in respect of software development services and IT enabled services and accordingly the case was referred to Transfer Pricing officer. Ld.TPO upon receipt of reference called for economic details of international transaction in Form 3 CEB. From details filed, Ld.TPO observed that assessee is a subsidiary of Goldman Saschs (Mauritius) LLC and Goldman Sachs (Mauritius) NBFC LLC, which were held by Goldman Sachs Group Inc. Ld.TPO observed that ....
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....SWD segment: S.no. Name of company Margin 1. Infosys Ltd 36.13% 2. Larsen and Toubro Infotech Ltd 24.61% 3. Persistent systems Ltd 35.10% 4. Ciginiti Technologies Ltd 27.62% 5. Mindtree Ltd 20.43 % 6. RS Software (India) Ltd 22.25 % 7. SQS India BSF I Ltd 22.37 % 8. Thirdware solution Ltd 44 .68 % Average margin 29.40% Ld.TPO, thus computed proposed adjustment being shortfall in arms length price for SWD segment at Rs. 87,50,25,800/- 2.5. Comparables selected by Ld.TPO for ITES segment: S.no. Name of company Margin 1. Infosys BPO Ltd 27.43% 2. Microgenetic systems Ltd 18.06% 3. Microland Ltd 20.07% 4. BNR Udyog Ltd (Seg.) 25.08% 5. Crossdomain solutions Pvt.Ltd. 21.07% Average margin 22.34% Ld.TPO, thus computed proposed adjustment being shortfall in arms length price for ITES segment at Rs. 64,40,32,300/-. 2.6. Ld.AO then issued draft assessment order under section 143 (3) read with 92CA of the Act on 22/12/17 and made transfer pricing adjustment at Rs. 1,51,90,58,100/-, as suggested by Ld.TPO under secti....
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....e Ld.AO regarding disallowance of 10% of provision for expenses under section 40 (a) (i)/(ia) for non-deduction of tax at source, pertaining to other payables. And disallowance of 10% on ad hoc basis under section 40 (a) (i)/(ia) in respect of payables to related parties. On receipt of DRP directions, Ld.AO passed the impugned assessment order by making addition of Rs. 5,42,96,89, 560/- to the returned income of assessee. Aggrieved by additions made by Ld.AO, assessee is in appeal before us now. 4. Ld.AR submitted that Ground No. 1-2.3 are general in nature and therefore do not require adjudication. 4.1. Ground No.2.4-2.5 has been raised by assessee challenging exclusion/inclusion of certain comparables under SWD and ITES segment. Before we undertake comparability analysis of comparables alleged by assessee, it's sine qua non to understand functions performed, assets owned and risks employed by assessee under these segments. 4.2.In TP study, it has been submitted that, assessee provides IT services and IT enabled services to its group companies. Assessee is engaged in building and maintaining the local information technology infrastructure and assists global teams in....
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....endered by assessee under this segment are divided into various divisions being operations, technology, finance, compliance division, human capital management, internal audit, legal and compliance, securities, investment management division, service finance procurement. It has been submitted that all these divisions are involved in providing backend support services to support the business process of assessee's group concerns. It has been submitted in TP study that assessee has entered into self-service agreement with the group companies on 09/03/06 provision of various back and support services. Details of various services rendered by assessee under these divisions are at page 129-144 of paper book volume 1. Assets owned: Assessee does not own any routine valuable tangible and intangible assets. Assessee only owns assets like computer equipment office equipment furniture's and fixtures etc for running the day-to-day affairs of business. Risks assumed: It has been submitted that, assessee do not own any risks and group companies being associated enterprises, assumes full risk in terms of contract, credit, market, price, quality capacity utilisation risks. As assessee wo....
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....a giant risk-taking company and is engaged in development and sale of software products and own intangible assets. Under such circumstances we deem it fit and proper to exclude this comparable from the finalist. Accordingly Ld. AO/TPO is directed to exclude this company. 5.1.2. Larsen and Toubro Infotech Ltd This comparable was upheld by authorities below and has been objected by assessee for its inclusion. Ld.AR submitted that this company is functionally not comparable with that of assessee and is engaged in providing consultancy and testing services. Further it has been submitted that there is no segmental information available in the annual reports of this company. Ld.AR submitted that this company owns its own brand and have products and are engaged in trading activity. This company also has R&D services and presence of huge intangibles and brands. On the contrary, Ld.CIT DR submitted that, this company should be remanded by following the view taken by coordinate bench of this Tribunal in case of CGI Information Systems and management consultants (P) Ltd. vs DCIT reported in (2019) 101 Taxmann.com 294. We have perused submissions advanced by both sides in light ....
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....ment Consultants Pvt.Ltd VS. DCIT(supra) was in respect of assessment year 2013-14. On perusal of annual report of this comparable placed at page 2012 of paper book volume 5, it is observed that during the year this company has not derived any revenue from sale of products. The only revenue earned by this comparable during the relevant year under consideration is from sale of services. It is observed at page 2022 that this company incurred overseas staff costs at Rs. 15,46,46,82,017/-, reveals that revenue earned from software services is mainly from offshore services. In the present case of assessee, there is no such expenses incurred for overseas staff costs. At page 2022 of paper book Volume 5, it is clear that export revenue from software services amounts to Rs. 44,14,84,25,372/- out of gross income of Rs. 46,43,94,03,178/-. In view of the aforestated observations for year under consideration, the issue of comparability of this company should be examined by Ld.AO/TPO afresh. Accordingly, we set aside this comparable back to Ld. AO/TPO. 5.1.3. Persistent Systems Ltd., This comparable was included by Ld.TPO and opposed by assessee. Ld.AR submitted that this company is fu....
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....We have perused submissions advanced by both sides in light of records placed before. From the annual report of this company placed at page 2334-2444, it is observed that at page 2413, segment reporting of this company is set to be comprised of software development, implementation and support services. Further it has been submitted therein that primary segment reporting is based on geographical areas, viz Domestic = India (products and services) and International = rest of the world (exports-software services). It is also been submitted therein that this company maintains separate books of account for the reported segments. In profit and loss account at page 2431, it is observed that during the year under consideration, this company earned revenue from sale of products whereas, revenue from sale of services is shown to be at 'nil'. Ld.TPO while considering this comparable only considered footnote at page 2433, wherein bifurcations of revenue from sale of products has been given as; export of software services has been recorded to be at Rs. 20194.37, software services from local units amounting to Rs. 414.07, revenue from subscription and training amounting to Rs. 59.32 and sale of ....
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..... Such activities are not comparable with the back-end support services rendered by assessee to its AE's only. Accordingly we direct exclusion of this comparable from the final list. 5.2.2 Microland Ltd It has been submitted that this company was included by Ld.TPO and objected by assessee. Ld.AR submitted that this company is functionally not comparable with assessee as it is engaged in infrastructure management services and has 2 segments being infrastructure management and ITES. Ld.AR submitted that Ld.TPO erroneously considered entity level margins for comparability purposes. He also submitted that, this company owns intangibles and has its own data processing equipment and earns revenue from device management. It also provides R&D activities services and provides cloud-based services to its clientele. Ld. CIT DR placed reliance upon the authorities below. We have perused submissions advanced by both sides in light of records placed before us. Ld.CIT DR submitted that that this comparable was rejected by DRP in assessee's own case for assessment year 2011-12, which was upheld by this tribunal wide its order dated 16/01/17 in ITA (TP) A No. 267/B/2015, is pl....
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.... company placed at page 2491 of paper book volume 6 wherein at page 2511 geographic income has been tabulated for year under consideration and income from software services and products by this company has been shown to be at 3621.72 lakhs. It is observed at page 2512 that this company is earning Rs. 35,99,47, 572/-in foreign exchange under software development segment. 6.2. Exilant Technologies Pvt.Ltd. Ld.AR submitted that the assessee prayed for inclusion of this company before DRP. However, DRP rejected the prayer of the assessee for the reason that financial result of this company is not available in public domain. Ld.AR has placed the annual report of this company at page 2611 of paper book volume 6. At page 2630 to is observed that revenue from operations has been earned by this company from products sale in India amounting to Rs. 1,05,76,204/- and at page 2611 the financial results show that income from software services and products total to Rs. 2981.0 3 million. 6.2.1.In respect of above two comparables Ld.CIT DR submitted that these companies may be sent back to Ld.AO/TPO for due verification due to contradictions in respect of annual report. 6.2.2. We have c....
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.... dissimilarity with that of assessee. However we direct Ld.AO/TPO to verify the said comparable afresh keeping in mind that assessee is a captive service provider that operates at low risk levels.. Accordingly, this comparable is also set aside to Ld.AO/TPO for due verification of FAR in accordance with law. 6.4. I2T2 India Ltd Ld.AR submitted that authorities below rejected this comparable only for the reason that details regarding related party transaction in case of this company was not available. Further it has been observed by authorities below that this company is operating in ITES industry. Ld.AR however submitted that this company undertakes various IT services, but its Indian company is engaged in undertaking software development services in India in the nature of executing software projects in India. It is also submitted that this company undertakes software consultancy services which forms a wherein miniscule part of the revenue base and therefore it can be said that this company is predominantly engaged in the business of software development services. He placed reliance upon decision of coordinate bench of this Tribunal in case of LG Soft India Pvt. Ltd.....
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....other comparables, as assessee do not wish to contest the same is not considered herein above for year under consideration. However assessee seeks liberty to contest other comparables in an appropriate situation. Accordingly remaining comparables under both segments alleged by assessee for exclusion in this ground are dismissed, with the liberty to contest in an appropriate case. Accordingly Ground 2.5 raised by assessee stands partly allowed for statistical purposes. 7. Ground No. 2.6-2.7 are in respect of computing incorrect operating margins of comparables by not granting appropriate working capital and risk adjustments. 7.1. It has been submitted by Ld.AR that working capital and risk adjustment has been denied to assessee on the ground that assessee failed to demonstrate such differences could have any impact on assessee's profit. It has been submitted by Ld.AR that the submissions advanced by assessee demonstrating computational impact has not been considered by the Ld.AO/TPO. Before us, Ld.AR submitted that it is an accepted principle upheld in various decisions of this tribunal that working capital adjustment should be allowed on actuals. It has been submitte....
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....igher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: ♦ A company will need funding to cover the time gap between the time it invest....
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.... working capital requirements to compute working capital adjustment is not proper, as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. 7.7. It must not be forgotten that transfer pricing analysis is estimation and not an exact science. One has to see that, reasonable adjustment must be made where ever it is needed, so as to bring both comparable and test party on same footing. In present facts of case, DRP may be correct in denying working adjustment due to unavailablity required data, however there is no merit in observations of DRP/TPO as supported by Ld.CIR DR, in denying working capital adjustment due to absence of details for working out adjustments in comparable companies chosen. If we appreciate the argument advanced by Ld.CIT DR, there would remain no comparables for the purpose of comparibility analysis to determine ALP of an international transaction, and this would be fatal to entire exercise of transfer pricing analysis. 7.8. Regarding comparable companies, one has to fall back upon only on information available in public domain. If that information is insuffic....
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.... Accordingly this ground raised by assessee stands allowed. 9. Ground No. 5-6 is in respect of disallowance under section 43 B towards leave encashment and bonus paid to the employees. 9.1. Assessee has filed before us certain additional evidences for deduction claimed under section 43B of the Act towards leave encashment. It has been submitted that certain additional evidences like salary slip, Form 16, PAN etc., were filed before DRP which was remanded to Ld.AO for due consideration. Ld.AR submitted that in the remand report Ld.AO did not admit additional evidence which was upheld by DRP. However Ld.AO suggested certain evidences to be submitted to substantiate the claim. DRP has noted that assessee failed to provide all the details as called for by ACIT pursuant to which, claim was rejected. At this juncture, it has been submitted that assessee again files additional evidence as called for by ACIT which may be verified by authorities below in respect of the claim made. 9.2. Ld.CIT DR objects to the admission of additional evidence. She placed reliance on decision of Chandigarh bench of ITAT in case of Rishi Sager vs ITO reported in (2013) 36 Taxmann.com 508. She submitt....