TaxTMI 
TaxTMI 
TaxTMI 
2020 (2) TMI 1222
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..../Kol/2017 for A.Y. 2010-11 and revenue's appeal in ITA No. 220/Kol/2018 for A.Y. 2011-12, have been taken into consideration for deciding the above appeals en masse. 3. The Revenue's appeal in ITA No. 2075/Kol/2017, for A.Y. 2010-11 is barred by limitation by 4 days. The Revenue filed a petition for condonation of delay requesting the Bench to condone the delay. We have heard both the parties on this preliminaryissue and having regard to the reasons given in the petition for condonation of delay, we condone the delay and admit the appeal of revenue for hearing on merits. 4. The assessee's appeal in ITA No. 552/Kol/2019 for A.Y. 2010-11, ITA Nos. 486 to 488/Kol/2019 for A.Y. 2011-12 & 2012-13 are barred by limitation by 553 days, 395 days respectively. The assessee filed a petition for condonation of delay requesting the Bench to condone the delay. The ld. Counsel for the assessee filed before us affidavit stating reasons of delay, which are reproduced below: 2. The petitioner had offered the above mentioned amount of education cess for tax under the normal provisions of the Act considering the same as an expense disallowable under section 40(a)(ii) of the Act. 3. For the AY ....
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....ample, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commissioner of Income-tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier." 7. The petitioner states that the Hon'ble Tribunal is vested with plenary powers to admit and adjudicate on questions of law arising in assessment proceedings although not raised earlier. 8. Your petitioner states that in not claiming deduction in respect of cess earlier, it had proceeded according to its own understanding of the law and as such did not agitate the quest....
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....IT(A) was justified in accepting the segmented accounts for AE for establishing arm's length price. This ground covers ground no. 3 raised by the revenue in A.Y. 2010-11. Grounds relating to Corporate issue 4.Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in treating the software expenses of Rs. 39,58,659/- [55,16,940 - 15,58,281] as revenue expenditure ignoring that the said expenses are of enduring measure. This ground covers ground no. 5 raised by the revenue for A.Y. 2010-11, ground no. 2 raised by the revenue for A.Y. 2011-12, ground no. 2 raised by the revenue in A.Y. 2012-13 and ground no. 2 raised by the revenue in A.Y. 2013-14. 5.Whether on the facts and in the circumstances of the case and in law the order of the ld. CIT(A) was erroneous because in absence of breakup of expenses incurred by the assessee and also without ascertaining the nature / utility of the software, it is simply not possible for the Assessing Officer to ascertain whether software were useful for day to day purpose or it gives enduring advantage to the assessee. This ground covers ground no. 3 raised by the revenue in A.Y. 2011-12, ground no.....
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....rofitability of the respective transaction. Thus, the economic analysis including the selection of tested party is based on the FAR profile of the transacting entities.The determination of margin for the tested party for the purpose of benchmarking analysis, is based on data derived from audited financial statements of the assessee and respective AE. ITC Limited is a part of the British American Tobacco (BAT) group and has a diversified presence in product segments ranging from Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri- business, Packaged Foods & Confectionery, Information Technology, Branded Apparel, Personal care, Stationery, Safety Matches and other FMCG products. In order to capture the opportunities offered by the global information technology (IT) business, ITC Limited restructured its IT division into a wholly owned subsidiary named I3L in October, 2000. ITC Infotech India Limited (I3L) I3L is a wholly owned subsidiary of ITC Limited, which is a part of the BAT group. For the purpose of this analysis, all companies in which BAT has equity/ management interest has been considered as associated enterprise of I3L. This is based on the assumption th....
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....ognition method are different therefore comparison of financial data is not possible, hence the foreign AEs should not be selected as a tested party. 10.On the other hand, ld Counsel for the assessee defended the order passed by the ld CIT(A). 11. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. We note that the selection of the tested party depends on the comparative evaluation of the functions performed, assets employed and risks assumed ("FAR profile") by the parties involved in an international transaction. The entity which is the least complex based on the evaluation is adopted as the 'tested party'. We note thatbased on a detailed FAR profile conducted by the Assessee, the foreign AEs were selected as the tested party for the purpose of a transfer pricing analysis since their FAR profile as marketing and administrative service provider is least complex as compared to I3L which is an entrepreneurial company. We note that the Ld. TPO in t....
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.... there seems to be no doubt that the entity with the least complex functions should be adopted as the tested party if reliable data for transfer pricing comparison is available. In the instant case,it is clear that the Assessee is performing the more complex functions when compared with the AEs (the functional profile has been confirmed by the Hon'ble High Court of Calcutta and the Jurisdictional ITATs- as mentioned above) and also the reliable information has been produced by the Assessee which has been used to undertake the transfer pricing analysis. Also out of the literature produced before me, I would like to put a special mention on the United Nations Practical Manual on Transfer Pricing for Developing Countries, 2017 (Part D- Country Practices- India) (Para D.3.2.3) which goes to prove that even the Indian tax authorities acknowledge that the tested party should be the least complex entity. Further, even the TPO in the TP Order (Pages 4-6 of the Transfer Pricing Order) has himself acknowledged the fact that the Assessee is performing the major functions and AEs merely act as the face of the Assessee in the respective countries. These observations are even more pertine....
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.... be selected as the tested party to the transaction, as being the least complex entity. Subsequently an analysis of gross margin by applying either CPM or TNMM retained by AEs should be undertaken for benchmarking the transactions...". Therefore this ruling overrules the findings made in the ruling of onward Technologies (supra) which was relied upon by the TPO in the assessee's case and incidentally was also relied upon by the D.R. in the above case of Landis + Gyrbut did not find any favour with the Hon'ble Kolkata Tribunal. Therefore, for the reasons stated above, I am in agreement with the analysis of the assessee and conclude that the overseas associated enterprise be accepted as the 'tested party' being the least complex of the transacting entity for the year for comparability analysis of international transactions of the assessee." Having gone through the order of ld CIT(A), we find that there is no infirmity in the order of ld CIT(A) treating the foreign AEs as a tested party. 12. For better understanding, the Function performed, Assets employed and Risk assumed, that is FAR analysis of the M/s ITC Infotech India Ltd. Vs. Foreign AEs are given below: 4. Functiona....
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....iaries is regulated by the contracts between 13L and the subsidiaries. Since the terms of the contract between each of the subsidiaries are similar, the following paragraphs outline the significant contractual terms. Resourcing: Under the contract 13L and its subsidiaries would exchange information on IT qualified professionals database with each other. upon a request being made by one party to the other. seeking deployment (either Offshore or Onsite) of its respective personnel for the work received from its client, the other party shall place suitably qualified personnel offshore or on-site at places required for the client/s of the other party. Such personnel deployed shall work under the direction and supervision of respective project manager(s) of clients. Both the parties shall exchange information received from their respective clients about requirement of IT professionals offshore or on-site and before such personnel are deployed by either party, each party shall provide the other, information including details of manpower requirements as well as the exact date from which such personnel are requited, with what kind of skill sets in IT, total number of months upto which su....
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....strative functions including lodging and collection of bills on the respective due dates, filing time sheets and obtaining approval of the Customers for the same etc. - Carrying out specific Customer assessment(s) including potential risk analysis, credit analysis etc. - 13L will provide 12A/12B with relevant information and documents necessary to enable it to perform the Administrative Services requested. Remuneration: If 13L subcontracts its obligations in accordance with this clause 4(A), the Parties agree that a fee equal to 25% of the revenue derived from the Customer Contract Shall be paid by 13L to 12A/12B. The services provided by 12A/2B in respect of this fee will be limited to Administrative Services and that, in such circumstances, 12B will not be liable or responsible for the delivery of services other than Administrative Services. Non Administrative Services: The non-administrative services rendered by 13L under the contract includes customization of software solution development, implementation and support of IT systems and solutions, IT facilities management services and other IT services which may be defined by the customers. Remuneration: If 12A/12B subco....
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....are the same. Under both the business models, the basic functions of the AEs, with regard to the administrative functions i.e. Account management, are the same. Similarly, 13L's functions under both the business scenarios, with regard to non-administrative services also remain the same. Intellectual Property: Each Party (13L, 12A or 12B. as the case may be) will retain full title to its own Background Intellectual Property Rights and Proprietary Information, and shall take such steps as may be necessary in connection with the use Of Such Background Intellectual Property Rights and Proprietary Information to facilitate performance of the other contracting party's obligations pursuant to a Customer Contract. All rights in Foreground Intellectual Property in whatever form, will belong to the Customer of either Party for whom they are created or to 13L, unless otherwise agreed by the Parties in any specific supplementary contract. If any Background Intellectual Property Of either Party existing prior to the commencement of the applicable supplementary contract, is to be included in any deliverable or work product created under any contract, such Background Intellectual Pr....
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....The assessee does not assume any risk and the services are rendered out of the assessee's own resources. 4.3.3 Inside Sales Services 13L has a dedicated team that provides call centre support services to 12A & 12B. The support services provided by the sales centre within 13L involves placing calls to potential customers based overseas in order to understand their requirements and accordingly, assisting 12A and 12B in their marketing functions. In order to provide these support services, 13L has a dedicated team in place who is trained to provide such services based on the requirements specified by 12A & 12B. 4.3.4 Corporate Guarantee In FY 2008-09. 13L has given a corporate guarantee to ICICI Bank Limited in favour of 12A, for which he bank has not charged any guarantee commission from 13L and hence, 13L has not incurred any cost. The guarantee by the assessee is not provided for availing any loan by 12A. The arrangement is made to provide a comfort to the sellers/founders of Pyxis Solutions LLC for their future contingent payments at the time of sale of Pyxis Solutions LLC to 12A. Further, the cost (i.e. commission) charged by ICICI Bank Limited is ultimately being b....
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.... vested with the clients or to 13L in case such arrangements are made. 4.1.2 Tangibles owned by 12A & 12B Tangible assets like equipment. purchased or internally developed software, furniture and fixtures and leasehold improvements are stated at cost. Depreciation is provided under various methods based upon the estimated useful lives of the assets. with such lives ranging up to four years. 4.1.3. Intangibles owned by 12A & 12B 12A has fair valued assets arising on acquisition of membership interest in accordance with statement of financial Accounting Standards No. 141 ("SFAS No, 141"), "Business Combinations" through an independent outside appraiser. Accordingly, the intangible assets arising on valuation of such assets as at March 31, 2010 are Trade name, Non-compete agreement, Customer relationship, know how, Goodwill. Intangible assets are stated at fair value at the date of Pyxis acquisition and are amounted on straight-line method over their estimated useful life of 4-8 years. Goodwill is not amortized but is subjected to impairment consideration. 12B does not own any significant intangible which has been valued in the accounts as assets. Since they deal with pr....
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...., for which were submitted by the assesse only on 20.01.2014. I however find certain infirmities in the submissions made by the A/R of the assessee vis-a-vis the documentary evidences placed on record. Some of these infirmities are discussed below: Email dated 16.07.2009 from Neetu Bajaj to Kirsta Roy sending invoices This shows that the services pertaining to billing & invoicing were being performed in India. Emails dated 25.11.2008 sent by Arun Kumar, Consultant, ITC Infotech India Limited in respect of proposal to Newell Rubbermaid This shows that the proposals were being drafted, prepared by the Indian company and not 12A & 12B. Emails enclosed in Appendix 2(c) All the emails show that the relevant proposals, presentations etc to given to the prospective clients were being drafted and prepared by the Bangalore office of the assessee Various emails are dated for FY 2008-09 All the emails are not pertaining to the relevant AY 20010-11 and therefore cannot be considered as services rendered during the year under consideration. 9.1 In view of the above it is noted that the assessee was deeply involved in the marketing & administrative services being performed by its AEs, ....
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....y the assessee in full. 9.3 In view of the foregoing it would not be wrong to raise serious questions the payment of 25% of gross revenues to 12A & 12B when the maximum functions re being performed by the asessee and not the AEs. Also virtually the entire risk is being borne by the assessee. In my view therefore 25% of the total revenues are on higher side and deserves to be trimmed down to lower levels. However in the absence of contemporaneous data, I cannot process to determine the arm's length sharing ratio of revenues. 9.4 Now coming to the argument of the assessee that since the AEs is the 'least complex' entity, they have 'been taken as the tested party. The assessee has relied on the OECD commentary which admittedly has been adopted by the Indian authorities. Hence, I am not bound by OECD guidelines. The argument of assessee is misconceived and is liable to be rejected. It is abundantly clear that ld TPO has also stated that subsidiaries act primarily as marketing arm of the assessee and perform administrative services. It is the assessee which is entrusted with the task of performing the non-administrative, core and essential services. Therefore, the ld TPO ha....
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....ed out in the case of the comparable is after taking into account the same items of expenditure as in the case of the taxpayer. 16. Aggrieved by the action of AO/TPO, the assessee carried the matter in appeal before the ld CIT(A). 17. During the appellate proceedings, the assessee submitted before the ld CIT(A) that the Ld. TPO had derived the above conclusion and framed erroneous view in complete disregard to the facts of the transactions and relevant benchmarking analysis. During the appellate proceedings, the assessee submitted before the ld CIT(A), in relation to transaction with BAT and Pyxis the assessee had selected internal CPM as the most appropriate method and not external CPM as erroneously concluded by the Ld, TPO in point (iii) above to establish the arm's length nature of these transactions. While undertaking internal benchmarking and comparing the gross margin, the subjectivity in margin computation does not arise. The accounting convention followed by the assessee for transactions with related and non-related parties is the same. The assessee does not follow separate accounting system and policies for different contracts in determining the gross margin. The ac....
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....O has rejected the use of CPM as the MAM by mentioning that CPM presents difficulties in identifying and segregating the cost between direct and indirect cost. The Assessee contends the above as explained below: International transaction with BAT and Pyxis With regard to the transaction with BAT and Pyxis, the Assessee had used Internal CPM to justify the international transaction wherein the Assessee compared the gross margin earned by the Assessee from transactions with independent third parties and the gross margin earned from transaction with BAT and Pyxis. The Assessee therefore submits that while undertaking internal benchmarking, the subjectivity in margin computation does not arise. The accounting convention followed by the Assessee for recording costs related to transactions with related and non-related parties is the same and therefore consistency in identifying the direct and indirect costs exists, contrary to the apprehension raised by the Ld, TPO. The Assessee places reliance in the following judicial pronouncements which have concluded that internal comparables have closer and direct relationship to the transaction under review than external comparables, ther....
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....3). From a reading of the extract from OECD guidelines, it looks like CPM is applicable to the present case of the Assessee 6. The submissions made by the assessee-company in the matter of the application of CPM as the MAM are noted below: "International transaction with BAT and Pyxis. With regard to the transaction with BAT and Pyxis, the Assessee had used Internal CPM to justify the international transaction wherein the Assessee compared the gross margin earned by the Assessee from transactions with independent third parties and the gross margin earned from transaction with BAT and Pyxis. The Assessee therefore submits that while undertaking internal benchmarking, the subjectivity in margin computation does not arise. The accounting convention followed by the Assessee for recording costs related to transactions with related and non- related parties is the same and therefore consistency in identifying the direct and indirect costs exists, contrarytothe apprehension raised by the Ld. TPO. The Assessee places reliance in the following judicial pronouncements which have concluded that internal comparables have closer and direct relationship to the transaction under review....
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....epted the segmented data/ segmental report observing the following: "Having carefully considered the observations of the ld. A.O. / TPO and the submissions of the assessee / ld. A.R. of the assessee company, I find that one of the contentions raised by the assessee and the ld. TPO is on the use of the segmental data of the overseas entities by the Ld. TPO for a transfer pricing analysis. The Ld. TPO had rejected the segmental accounts of the overseas entities used by the Assessee for the transfer pricing analysis mentioning that the segmental data which preparedthe Assessee, was not audited either by the statutory auditors or the transfer pricing auditors. On this issue, the Assessee has produced judicial pronouncements before me, wherein the ratio emerges that the segmental accounts used in a transfer pricing analysis need not be audited. The Hon'ble ITAT in Lummus Technology Heat Transfer BV [2014] 162 TTJ 263 (Delhi - Trib.) has held that it is not necessary that a computation should be based on segmental accounts in the books of accounts regularly maintained by the assessee and subjected to audit. The Hon'ble ITAT held that the authorities were in error in rejectin....
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....sessee can be used for the transfer pricing analysis as done in the TP Study." 23. Aggrieved by the order of ld CIT(A), the Revenue is in appeal before us. We have heard both the parties and perused the material available on record. We note the assessee explained before ld TPO in thread bare detail of functional analysis of the transactions and the Ld. TPO has failed to give due cognizance to the essence of the respective transaction. All the transactions are independent in terms of activities, purpose and legally through binding agreement. The cost of rendering/ receipt of services are also captured separately in the accounting system. In support of the same, the assessee has provided the segmental data of I2A and I2B for transactions with the assessee, the margin of which was benchmarked from arm's length perspective.We have gone through the findings of ld CIT(A) and do not find any infirmity. That being so, we decline to interfere with the order of Id. C.I T.(A) in deleting the aforesaid additions. His order on this addition is, therefore, upheld and the grounds of appeal of the Revenue are dismissed. Grounds relating to Corporate issue 24. Summarized Ground nos. 4 and ....
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.... Account by the Appellant Company under Schedule 16 of the Audited Annual Accounts - Annexure 4 4,97,97,541/- The assessee was subjected to Scrutiny Assessment under section 143(2) of the Act conducted by the AO. After the assessment proceedings the AO issued the order under section 143(3) of the Act dated 27th March 2014 wherein the expenditure incurred on the purchase of application software amounting to Rs. 55,16,940/- was treated as capital expenditure and the assessee's claim of treating the same as revenue expenditure was disallowed. 26. Aggrieved by the order of AO, the assessee carried the matter in appeal before the ld CIT(A), who has partly deleted the addition observing the followings: "On the issue pertainingto treatment of software expenditure, I have carefully examined the submissions and perused the judicial precedents cited in support of the assessee' s contentions Though the assessee has relied upon a number of decisions, including appellate order for earlier year, treatment of expenditure on software as capital / revenue is essentially a question of facts, which naturally varies from case to case and even from year to year. Expenditure towards pur....
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....ke any other component or consumable item used for the purpose of earning revenue. The assessee 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. We note that while disallowing the expenditure incurred on purchase of application softwares the Assessing Officer ignored the fact that Application softwares are used by the assessee for the efficient conduct of its business and do not extend any enduring benefit to the assessee company. After doing critical analysis, the ld CIT(A) noticed that software expenses to the tune of Rs. 15,58,281/- is enduring nature and therefore classified them as capital assests. We do not find any infirmity in the order of ld CIT(A), his order on this issue is hereby accepted and grounds of appeal raised by the Revenue are dismissed. 28. Now, we shall take grounds raised by the assessee. Grounds raised by the assessee Deduction of education cess and higher education cess as allowable expenses. This ground covers ground no.1 raised by the assessee in A.Y. 2010-11 to 2013-14 respectively. 29. Before us, Ld. Counsel s....
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....ii).Peerless General Finance & Investment Co. Ltd. -vs. - DCIT (ITA No. 937/Kol/2018) - "37. Additional ground raised by the assessee in ITA No.937/Kol/2018 for A.Y.2010-11 reads as under: "That on the facts and in the circumstances of the case, the authorities below erred in not allowing deduction U/s 37(1) of the Income Tax Act,1961, on account of Education Cesses paid by the assessee while arriving at the assessed income for the year under appeal. " 38. After giving our thoughtful consideration to the submission of the parties and perusing the judicial decisions relied upon by the Ld. AR, we find that the issue involved in the present ground of appeal is no longer res integra. The education cess being not 'income tax' is allowable as deduction under section 37 (1) of the Act. For this, we rely on the judgment of the coordinate Bench of IT AT Kolkata in the case of ITC Limited, ITA No.685/Kol/2014, order dated 27.11.2018, wherein it was held that education cess is an allowable expenditure under section 37(1) of the Act. Therefore, we direct the assessing officer to verify all the relevant facts and allow education cess as deduction under section 37(1) of the Act. " (iii) T....