TaxTMI 
TaxTMI 
TaxTMI 
2019 (5) TMI 1745
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....ed in proposing several additions based on mere conjunctures and surmises, ignoring the factual matrix of the company as well as the nature of the transactions undertaken by the appellant. 1.2 That the Ld. AO failed to appreciate the submissions made/ contentions raised by the appellant and further erred in making several observations and inferences in the impugned assessment order which are factually incorrect and legally untenable. Transfer Pricing ("TP") Grounds 2. That, in framing the impugned assessment order, the reference made by the Ld. AO under section 92CA(1) of the Act suffers from jurisdictional error, as the Ld. AO had not recorded any reasons nor he had any material whatsoever on the basis of which he could even reach a prima-facie opinion, that it was 'necessary or expedient' to refer the matter to the learned Deputy Commissioner of Income Tax, Transfer Pricing Officer - I( 1)(1), New Delhi (hereinafter referred to as "Ld. TPO") for computation of arm's length price ("ALP") 3. That on the fact of the case and in law, the Ld. AO/ Ld. TPO / Hon'ble Dispute Resolution Panel ("Hon'ble DRP") has erred by not accepting the economic analysis undertaken by the Ap....
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.... and in not passing a speaking order, giving reasons, for exclusion of these companies for the purpose of determination of ALP of international transaction of provision of CSD services despite specific directions of Hon'ble DRP to that effect. 5. That on the facts and circumstances of the case and in law, the direction issued by Hon'ble DRP under section 144C (5) of the Act is bad in law and void ab initio since the subject directions direct the Ld. TPO/ Ld. AO to make further enquiiy by requiring the Ld. AO/ Ld. TPO to pass a speaking order in relation to inclusion/ exclusion of companies such as Microland Ltd., Desein Private Ltd, Infomile Technologies Ltd, Silverline Technologies Ltd. and Lucid Technologies Limited as comparable, which is in contravention to the provisions Section 144C(8) of the Act. 6. That on the facts of the case and in law, the Ld. TPO / Hon'ble DRP has erred in rejecting the Appellant's claim to use multiple year data for computing the arm's length price and, instead, has adhered to the use of single year updated data to conclude the ALP of the international transaction which was not available to the Appellant at the time of undertaking transfer p....
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....y the Appellant pursuant to breach of its contractual arrangements on the grounds that the same could not be verified. 14.1 That the Ld. AO failed to follow the spirit and intent of the directions of the Hon'ble DRP as he failed to appreciate the correct facts and evidences brought on record for verification in accordance with the directions of Hon'ble DRP and further erred in making several allegations, observations and inferences in the assessment order which are both factually incorrect as well as legally untenable. 15. That on the facts and circumstances of the case and in law, the Ld. AO has erred in proposing to disallow an amount of Rs. 6,17,20,463/- under Section 37(1) of the Act on account of prior period expenditure. 15.1 That on the facts and circumstances of the case and in law the Ld. AO has erred in summarily rejecting the appellant's contentions and not considering the binding judicial precedents which squarely applies to the facts of the appellant's case. 16. That on the facts and circumstances of the case and in law, the Ld. AO is not justified in making a disallowance of Rs. 28,61,300/- by applying Rule 8D read with Section 14A of the Act, having regar....
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....hdraw any of the above grounds of appeal either before or during the hearing before the Hon'ble Tribunal. Further, the aforesaid grounds are mutually exclusive and without prejudice to each other. 2. Briefly stated facts of the case are that the assessee was engaged primarily in distribution and sale of digital switching equipments, cellular exchange equipment and other telecommunication equipment and provision of related services. During the year under consideration, it also provided intra-group marketing, technical support and contract software development services. The assessee filed return of income for the year under consideration on 29/11/2013, declaring total income of Rs. 178,69,64,430/-, which was further revised to Rs. 111,54,93,650/-, in the revised return of income filed on 12/11/2014. The case was selected for scrutiny and statutory notices were issued and complied with. The Assessing Officer noted the International Transactions carried out by the assessee with Associated Enterprises and accordingly, referred the matter to the learned Transfer Pricing Officer (TPO) for determination of arm's length price of those international transactions. The learned TPO in his ord....
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....ransaction pertaining to provision of contract software development ("CSD") services. 8.2 The learned AO/ TPO and Hon'ble DRP, in particular, erred in rejecting Cat Technologies Limited, Maveric Systems Limited, Infomile Technologies Limited and Silverline Technologies Limited as comparables selected by the Appellant on account of functional dissimilarity for the purpose of determination of arm's length price ("ALP") of international transaction pertaining to provision of CSD services, KIA. 8.3 The learned AO/ TPO and Hon'ble DRP, in particular, erred in selecting Allcargo Logistics Limited, HSCC (India) Limited, Mitcon Consultancy & Engineering Services Limited, Holtec Consulting Private Limited, Certification Engineers International Limited and Acropetal Technologies Limited (Segmental) as comparables without appreciating that these companies are not functionally comparable to the Appellant in relation to the international transaction pertaining to provision of technical support services ("TSS"). 8.4 The learned AO/ TPO and Hon'ble DRP, in particular, erred in rejecting Microland Limited (Segmental) and Desein Private Limited as comparables selected by the Appellant for ....
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....f the comparable companies was within the plus minus (+5%) range, the assessee found the price of International transaction declared by it at arm's length price. The assessee after applying various filters over the database like exclusion of companies having software development service income less than rupees one crore, exclusion of companies having revenue from service less than 75% of the total operating revenue, exclusion of the companies having insufficient financial data etc, selected 10 companies as comparable. The Ld. TPO, however, rejected certain comparables due to functional dissimilarity etc. reasons and included few comparables to the final list of 14 comparables having average margin of 18.47%. Accordingly, the learned TPO computed adjustment of Rs. 57,34,68,890/-to the software development services segment. 4.3 Under the Technical Support Service (TSS) segment, the taxpayer provided support services to its Associated Enterprises (AEs). The services included technical services in the nature of fault ticket generation support with regard to integration, installation, Inter-operator ability testing, on-site installation and development support, service migration etc. ....
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.... in assessment year 2011-12 has been upheld by the Hon'ble Delhi High Court. He submitted that the DRP in its direction for assessment year 2014-15 has rejected the company is comparable. The learned counsel also relied on number of decisions including decision of the Hon'ble Delhi High Court in the case of Agnity India Technologies Private Limited.( ITA 1204/2011). (ii) The Ld. DR on the other hand relied on the order of the lower authorities and submitted that the company is functionally similar to the assessee. (iii) We have heard the rival submissions and perused the relevant material on record. The learned DRP retained the company is comparable holding that research and development activity, owning of intellectual property right and brand building does not effect on the margin of a company. The contention of the Ld. DRP is that when the PLI as OP/TC is taken under TNMM, the effect of brand assets owned will not have impact on margins and the margins will be affected if a PLI like OP/capital employed had been used for comparability. The learned DRP has further relied on the its direction for assessment year 2012- 13. However, the functional dissimilarity has not been exam....
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....ny has been accepted as a valid comparable. But, we find that the lower authorities have not examined properly the functional dissimilarity of the company. The learned DR could not controvert what that the company is engaged in sale of products along with the services. We find that on page 44 of the learned TPO's order, he himself has mentioned that the company was engaged in sales of the the products namely "AccuRUSI" and " Unitrax". Further on perusal of the profit and loss account, we find that operating expenses includes cost of bought out items for resale which amounts to Rs. 27,10,89,274/-and there is no separate bifurcations of the revenue from sale of these bought out items. In view of these observations, it is evident that the revenue of the company declared during the year under consideration include sale of products. As no separate segment of software development being available, the company at entity level, cannot be considered as functionally similar to the CSD Segment of assessee. In view of the functional dissimilarity of the company with the CSD Segment of assessee, we direct the Ld. AO/TPO to exclude the company from the set of the final comparables. 3. Minded T....
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....s. We believe that our comprehensive portfolio of service offerings helps our customers achieve their key business objectives." (iii) Further, on perusal of the page 442 of the Annual Report compendium, we find that the company has used expertise in research and development to provide technology consulting services to its customers. (iv) On page, 480 of the Annual Report compendium under significant accounting policies and notes to account for the year ended 31/03/2013, the company has been treated as consulting and Implementation Company. The relevant part of the notes to account is reproduced as under: "Mindtree Limited ('Mindtree' or 'the Company') is an international Information Technology consulting and implementation company that delivers business solutions through global software development. The Company is structured into two business units - Information Technology {'IT') Services and Product Engineering {'PE') Services. IT Services offer consulting and implementation and post production support for customers in manufacturing financial services, travel and leisure and other industries, in the areas of ebusiness, data warehousin....
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....submitted that the company might be excluded from the final set of the comparables. (ii) The learned DR, on the other hand, relied on the order of the lower authorities and submitted that under that TNMM a small variations in vertical activity might be accepted. (iii) We have heard the rival submission and perused the relevant material on record. The learned TPO observed that the company delivers services across all stage of the product life-cycle, which enables them to work with a wide range of customers and allow them to develop, enhance and deploy their customer software products. The learned DRP further relied on the its direction for assessment year 2011-12 and 2012-13, where it has been approved as a valid comparable. As far as direction of the DRP for assessment year 2011-12 and 2012-13 is concerned, the Tribunal has already reversed the finding in the order in ITA No.6586/Del/2015 for assessment year 2011-12 and ITA No. 1112/Del./2017 for assessment year 2012-13. The Tribunal in assessment year 2012-13 held the company as functionally different from the assessee. In the year under consideration, also we find from the pages 214, 222, 302, 345 and 347 of the compendium ....
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.... 2. HSCC (India) Ltd. (i) The learned counsel submitted that the company fails to qualify the filter of a ratio of service income to total income being more than 75%, because in the case of the company the said ratio is only 57.92%. Further the learned counsel submitted that learned DRP in its direction for assessment year 2014-15 has excluded the company from final set of the comparables by observing that it is a government undertaking and FAR profile of the company is different from the FAR profile of the TSS segment of the assessee. The learned counsel submitted that 99% of the shares of the company are held in the name of President of India. He further submitted that the company is engaged in providing consultancy services for design and engineering, construction contracts(project management) procurement of medical equipment, drug and pharmaceutical etc for various projects. (ii) The learned DR, on the other hand, relied on the order of the lower authorities. (iii) We have heard the rival submission and perused the relevant material on record. In case of the company, the learned TPO has noted that it is engaged in rendering comprehensive range of professional consult....
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....ther hand, relied on the order of the lower authorities. (iii) We have heard the rival submission and perused the relevant records including the Annual Report of the company. We find from page 820 of the Annual Report compendium that the company has received capital grant from the Department of Science and Technology, Government of India for export facilities and Centre and for setting up Biotechnology Laboratory. The company has also received a grant from Ministry of Food Processing, Government of India and Technology Development Board, Government of India. The receipt of grant has affected the profit margin of the company and therefore comparing the assessee's margin of TSS segment would not be a fair comparison. Further, functional profile of the company is evidently different from the functions performed by the assessee under TSS segment. We also note that Ld. DRP in assessment year 2014-15 has directed to exclude the company on the ground of receipt of government grants and FAR profile being different from the assessee. We also note that no appeal has been filed by the Revenue against the said finding of the learned DRP. Thus, in view of the govt. assisted company and funct....
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.... the assessee and accordingly, we direct the Ld. AO / TPO to exclude the company from the final set of the comparables. 5. Certification Engineering International Ltd. (i) The learned counsel submitted that the company is engaged in certification activities and third-party inspection job, which cannot be compared to the TSS segment of the assessee. The Ld. counsel also submitted that the company is a government company and providing services to government companies and government agencies. The learned counsel submitted that DRP in its direction for A.Y. 2014-15 has rejected HSCC and Mitcon on the ground of being government of India undertaking. He further submitted that the company also fails the related party transactions filter of 25%. The learned counsel submitted that in the case of the company related party transactions are of Rs. 99, 125,330, which are 34.86% of the sales and thus as per the direction of the learned DRP, the TPO/AO should have excluded the company from the final set of the comparables. (ii) The learned DR, on the other hand, relied on the order of the lower authorities. (iii) We have heard the rival submission of the party and perused the relevant....
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....elopment. In our view, the engineering design segment of the company is functionally dissimilar to the technical support service segment of the assessee. Accordingly, we direct the Ld. AO/TPO to exclude the company from the final set of the comparables. 4.7 In view of our above directions regarding excluding of the comparables, the learned AO/TPO is directed to re-compute the average margin of the final set of the comparables and determine the transfer pricing adjustment for both the segment of Contract Software Development (CSD) and Technical Support Service (TSS). The ground Nos. 4.1 and ground No. 8 (including modified grounds) of the appeal are allowed for statistical purposes. Remaining grounds out of grounds no. 2 to 13 have not been pressed before us, accordingly, we are not adjudicating upon the same and hence, dismissed as infructuous. 5. The ground No. 14 on 14.1 of the appeal relates to disallowing of liquidated damages of Rs. 1,64,00,000/- and the ground No. 15 to 15.1 of the appeal relate to disallowance of Rs. 6,17,20,463/- under section 37(1) of the Act on account of prior period expenditure 5.1 Before us, the Ld. counsel of the assessee submitted that issues o....
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....xt of the facts enumerated hereinbefore the court answers the question framed by holding that the expression "does not form part of the total income" in section 14A of the Act envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year." 6.4 Since in the instant case, the assessee has not earned any exempt income during the year under consideration, no disallowance can be made under section 14A of the Act, respectfully following the decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd. (supra). The disallowance made by the lower authorities is accordingly deleted. The ground no. 16.2 of the appeal is accordingly allowed. Since the disallowance under section 14A has already been deleted by us, we are not adjudicating grounds No. 16 and 16.1 of the appeal, being rendered academic only. 7. The ground Nos. 17 on 17.1 of the appeal relate to disallowance of Rs. 44,67,442/- on account ....
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.... there is no finding on fact in the draft assessment order, and the addition proposed is simply ad hoc in nature. The submissions of the assessee that the entire funds raised have been deployed in the business of the appellant company and interest paid thereon is justifiable on the grounds of "commercial expediency" and "used for the purpose of Business" has not been controverted by the AO. The Hon'ble Supreme Court in the case of M/s S A Builders v. Limited v. Commissioner of Income-Tax (Appeals) and Another {(2007) 288 ITR 1 (SC)J has observed as under: "In order to decide whether interest on funds borrowed by the Appellant to give an interest free loan to a sister concern (e.g. a subsidiary of the Appellant) should be allowed as a deduction under section 36(1) (iii) of the Income Tax Act, 1961 one has to enquire whether the loan was given by the Appellant as a measure of commercial expediency. The expression "commercial expediency" is one of wide import and includes such expenditure as a prudent business man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was i....
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....Laxman Dass Vs Income Tax Officer {(2002) 122 Taxman 263 (Delhi) (Mag)], Gujarat Narmada Valley Fertiliser Co. Ltd. Vs Deputy Commissioner of Income Tax [(2000) 108 Taxman 213 (Ahd)(Mag)], Commissioner of Income-Tax vs. Hotel Savera [(1999) 239 ITR 795 (Mad)], Shree Digvijay Cement Co. Ltd. Vs Commissioner of Income-tax, Gujarat- V [(1982) 138 ITR 45 (Guj)], D & H Secheron Electrodes Pvt. Ltd. Vs Commissioner of Income-tax, Bhopal [(1984) 149 ITR 400 (MP)] wherein it has been held that no addition on account imputed interest attributable to allegedly interest free advances is called for and that a nexus is required to exist and be proved between the borrowing and lending of funds." 7.4 The learned DR accepted that no appeal has been filed against the said directions of the learned DRP for assessment year 2014-15. Thus, in view of the rule of the consistency, being no change in the facts and circumstances in the year under consideration, the disallowance in dispute is directed to be deleted. The ground of the appeal is accordingly allowed. 8. The ground No. 18 of the appeal relate to disallowance of Rs. 76,446/- on account of contribution to labour welfare fund. Before us, the p....