AI Drafter 
TaxTMI 
TaxTMI 
2019 (5) TMI 1745
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....ircumstances of the case and in law, the Ld. AO has erred 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'....
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.... Technologies Limited, Silverline Technologies Limited and Lucid Technologies Limited as comparable companies 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 conclud....
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....Tax Grounds 14. That on the facts and circumstances of the case and in law, the Ld. AO has erred in disallowing the liquidated damages of INR 1,64,00,000/- incurred by 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.....
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....has erred in initiating penalty proceedings under section 271(l)(c) of the Act mechanically and without recording any adequate satisfaction for its initiation. The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw 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 Transac....
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....ble Dispute Resolution Panel ("DRP"), in particular, erred in selecting Infosys Limited, Larsen and Toubro Infotech Limited (Segmental), Persistent Systems Limited and Mindtree Limited as comparables without appreciating that these companies are not functionally comparable to the Appellant in relation to the international transaction 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 ....
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....re development (CSD) services provided to the Associated Enterprises (AEs) determine the arm's length price applying Transactional Net Margin Method (TNMM). The Operating Profit to Total Cost (OP/TC) was taken as profit level indicator (PLI) in the TNMM analysis. The "PLI" of the assessee company was arrived at 7.98 percent, whereas the average PLI of the comparables was arrived at 8.20%. As the average margin of 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. 57,34,68,89....
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....e also submitted that the turnover of the company is 62 times the turnover of the assessee from provision of CSD services. The Ld. counsel submitted that the company earns from dealing in software products and earns income from software licensing as well. The learned counsel also submitted that the company has been rejected in assessee's own case by the Tribunal in assessment year 2011-12 and 2012-13 and the decision of the Tribunal 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 an....
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....gin. (iii) We have heard the rival submissions of the parties. The learned DRP retained the comparable on the ground that the assessee failed to demonstrate or adduce evidence to show that how objections raised regarding the research and development, IP/intangibles ownership has impacted the margins and how it can automatically become the basis for adjustment. The learned DRP also relied on the direction of the DRP for assessment year 2012-13, where the company 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....
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....the director's report is reproduced as under: "We have developed a comprehensive range of services allowing us to offer end-to-end IT Services to our clients. With delivery centers in India and overseas, we offer IT strategy consulting, application development and maintenance, data warehousing and business intelligence, package implementation, product architecture, design and engineering, embedded software, technical support, testing infrastructure management services etc. to our customers. 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 Com....
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....penditure which resulted in global patents and the company owns significant intangibles which have either been developed or have been acquired from 3rd parties as part of inorganic growth strategy. The learned counsel also submitted that the company has been rejected by the Tribunal in assessee's own case for assessment year 2011- 12 and assessment year 2012-13. The decision of the Tribunal of rejecting the company has been upheld by the Hon'ble Delhi High Court in assessment year 2011-12 . In view of the above, the learned counsel 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 f....
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....r company fails any of the filters approved by the learned DRP, however, the functional dissimilarity was not examined properly by the learned DRP. On perusal of the pages 648, 651, 663, 690 and 720 of the compendium of the Annual Reports, we find that the company is engaged in providing logistic and transport solutions as against the assessee, who has provided technical support services. The company being functionally dissimilar with the TSS segment of the assessee, we direct the Ld. AO/TPO to exclude the company from the final set of the comparables for TSS segment. 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 compan....
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....se material which cannot be compared to the TSS segment of the assessee. Further, the learned counsel submitted that the company has received grants from government of India to support such operation and need to be excluded on the ground of government assisted company. The learned counsel submitted that the learned DRP for its direction for assessment year 2014-15 has excluded the company from the final set of the comparables by observing that it has received government grant and FAR profile of the company being different from the FAR profile of the TSS segment of the assessee. (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 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....
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....on of the company. We find from page 873 of the compendium of Annual Reports, that the company is primarily engaged in the business of rendering engineering consultancy services to its clients located in India and abroad. Under the consultancy services, the recipient is advised in carrying out the actual project or task whereas under the technical support services, the assessee itself has executed the task on the project and thus the function of providing consultancy is different from the function of providing technical support services. Thus the company being functionally dissimilar to the assessee, it cannot be compared with the TSS segment of 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....
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.... to the finding of the learned TPO who has found the engineering design segment of the company as comparable to the technical support segment of the assessee. He also supported the finding of the learned DRP that under the TNMM small variation in verticals are tolerated. (iii) We have heard the rival submission and perused the relevant material on record. The services rendered by the assessee under the technical support service segment include fault ticket generation support with regard to integration, installation, interoperability testing, on-site installation, update/upgrade etc, which cannot be compared functionally with the services of providing designs or product design and development. 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....
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....Income-tax Rules, 1962 read with section 14A of the Act. 6.1 Before us, the learned counsel of the assessee submitted that no exempt income has been earned by the assessee during the relevant assessment year and thus in view of the decision of the Hon'ble Delhi High Court in the case of Cheminvest Limited reported in 378 ITR 33W (Delhi), no disallowance can be made in the hands of the assessee. The Ld. DR also could not controvert the fact that no exempt income has been earned by the assessee during the year under consideration. 6.3 We have heard the rival submission and perused the relevant record. The Hon'ble Delhi High Court in the case of Cheminvest Ltd (supra) has held as under: "In the context 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 o....
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....Accordingly, he made disallowance of proportionate interest expenses of Rs. 44,67,442/-. We find that identical question of disallowance under section 36(1)(iii) was before the learned DRP in assessment year 2014-15. The Ld. DRP, after considering the finding of the Ld. AO in draft assessment order and submission of the assessee, deleted the addition observing as under: "2.6.3 From the draft assessment order it is observed that the AO has simply disallowed interest by imputing the argument that interest should have been charged on the funds/loan given to other parties without making any effort to bring on record sufficient facts so as to establish the nexus between borrowed funds and funds advanced to CARC In fact 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....
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....ii). and in the case of a firm, further that the amount does not exceed the limit fixed by section 40(b)(iv). Held, however, on the facts, in this case, that since the Appellant had borrowed the moneys from its partners as early as 1991. and the Appellate Tribunal had held that the loans were given by the partners for business purposes and the interest did not exceed 18 per cent per annum simple interest, the Appellant-firm was entitled to deduction of interest on the borrowings for the assessment years 1993-94 to 1997-98.' Similar view has been followed in the case of Commissioner of income Tax v. Motor Sales Limited [(2008) 304 ITR 123 (All)], Commissioner of Income-tax Vs Pudukottai Company Pvt. Ltd. [(1972) 84 ITR 788 (Mad)], Chetan Dass 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....