TaxTMI 
TaxTMI 
2020 (5) TMI 86
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.... to as "Appellant") respectfully craves leave to prefer an appeal against the order passed by Deputy Commissioner of Income Tax, Circle-5(1)(1) ("Assessing Officer" or "AO"), dated 30 January 2017 for A Y 2012-13, under section 143(3) read with section 144C of the Income Tax Act, 1961 ("the Act") pursuant to the directions issued by the Honourable Dispute Resolution Panel ("Hon'ble DRP"), Bangalore dated 01 December 2016 under section 144C(5) of the Act ("the impugned order"), inter-alia on the following grounds: That on the facts and circumstances of the case and in law: General Grounds 1. The impugned order and directions of the Hon'ble DRP are based on incorrect appreciation of facts and wrong interpretation of law and therefore, are bad in law; 2. The learned AO / Transfer Pricing Officer ("TPO") has erred in assessing the total income at INR 324,935,945 as against the returned income of INR 244,543,220 computed by the Appellant in its return of income for A Y 2012-13; 3. The learned AO has erred in law and in fact, in determining a sum of INR 40,638,140 as the balance tax demand payable by the Appellant; Transfer Pr....
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....parable companies. 11. The learned AO / TPO have erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant visa- vis the com parables. Corporate Tax Grounds 12. The learned AO has erred in law and in facts, in disallowing the stock compensation expense amounting to INR 6,523,426 on the basis that, tax has not been deducted at source on the amount of perquisite taxable in the hands of the employees, without appreciating the fact that as per the provisions of Section 17 of the Act, perquisite taxation would arise only at the time of exercise of the option. 13. The learned AO has erred in law, in disallowing the payment made towards purchase of software amounting to INR 134,700 due to non-deduction of taxes at source, without appreciating the fact that this expenditure does not pertain to the current assessment year. 14. The learned AO has erred in inadvertently increasing the income by adding depreciation amounting to INR 3,125,527 instead of reducing the same while computing the income. Other Grounds 15. The learned AO has erred in levying interest of INR ....
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.... No prejudice would be caused to the Respondent by reason of the above additional ground being admitted and adjudicated and accordingly the balance of convenience is in favour of such an order being passed by this Hon'ble Tribunal. The Petitioner states and submits that the issues raised in the additional ground above arise out of the order of the lower authorities. Reliance is based on the decisions of the Hon'ble Supreme Court in the case of Jute Corporation of India vs. C.I.T. (187 ITR 688) and National Thermal Power Corporation vs. C.I.T. (229 ITR 383) as well as the full Bench of the Bombay High Court in the case of Ahmadabad Electricity Co. Ltd. (199 ITR 351). In the above circumstances the Petitioner prays that this Hon'ble Tribunal may kindly be pleased to; (i) admit and adjudicate the above additional ground, (ii) pass any other order that may be required in the circumstances of the case and render justice. ADDITIONAL GROUND dated 05.03.2018 In addition to the grounds of objections raised in Form 36A before the Hon'ble Tribunal (after ground number 15) and the additional grounds filed earlier, after ground numb....
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....at the assessee-company is engaged in the activities in India, which includes design and sales agent support services NXP's design competence centre in Bangalore offers user solutions for vibrant medis technologies and focuses on automotive, identification and software businesses. The segmental (SWD segment) financials as given in the TP study is as under:- Particulars Amount (SWD Segment) Operating income 885470219 Operating Expenses 820219617 Operating profit 65250602 OP/OC 7.96% OP/OR 7.37% The international transactions (as mentioned in the 92 CE report) is as under:- Particulars Amount Software development services 885470219 Sales agent support services 102116858 Receipt of services 54,176895 Fixed assets received free of charges 8176309 Reimbursement of costs 4942058 Total 1054882331 5.1 For the above determination of Arms Length Price (ALP), the assessee selected 25 comparables, however, the TPO limited the comparables to the extent of 10 out of which 4 selected by the assessee were retained by the TPO. The 10 comparables selected by the TPO were as follow:- (i) Datamatics Global ....
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....as sale of software products. Albeit the percentage of software products in the total revenue is less, as has been noted by the TPO, and also there is no precise information about the contribution made by such small sale of software products to the total profits of the company. As no segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, it was directed to exclude Persystent Systems Limited from the list of comparables. In the present case also, it is noticed that Persystent Systems Limited is engaged in software products development. There is a difference between the outsourced software product development and IT services, which is evident from page nos. 973 and 974 of the paper book, as under:- "Outsourced Software Product Development (OPD) is different from IT services. Unlike a typical IT services project, where requirements are fixed while time and money are variable, a software product development project starts with fixed time and money, thus leaving requirements as the only variable. Essentially, the product development team's task is to produce the best set of requirements withi....
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....nd domestic revenue was Rs. 1,756,792,454. Further in the case of Huawei Technologies India Pvt. Ltd. in IT(TP)A No.1939/Bang/2017 for assessment year 2012-2013 - order dated 31.10.2018 has taken the same view that it cannot be a comparable with that of the assessee. Being so, we direct the TPO to exclude the same from the list of comparables. INFOSYS LIMITED 8. The argument of the learned AR is that Infosys Limited is functionally different from the assessee. It owns intangible and undertakes research and development. The learned AR also submitted that it has high brand value and turnover. On the contrary, the learned DR submitted that the nature of services remains the same irrespective of whether it is engaged in providing onsite / offsite services. 8.1 We have heard the rival submissions and perused the material on record. Similar issue came up for consideration before the Tribunal in the case of NXP Semi Conductors India Pvt. Ltd. v. DCIT in IT(TP)A No.1634/Bang/2014 - order dated 27.07.2015, wherein it was held as under:- "10.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited ....
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....re development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has gener....
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....m the list of comparable companies." 10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems Services BE, India Branch (supra), we direct the Assessing Officer/TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider." 8.2 In the present case also, Infosys Limited is engaged in a leading global technology services corporation. The company provides business consulting, technology, engineering and outsourcing services to help clients build tomorrows enterprise. In addition, the company offers software products for the banking industry. It owns high brand value at Rs. 56,286 crore in the year 2012 and percentage of brand value to revenue is 1.67% and brand value as a percentage of market capitalization is 34.2%, and also incur huge amount for research and development at Rs. 5 crore as a capital expenditure and Rs. 655 crore as a revenue expenditure for the year ended 31st March, 2012. Therefore, it cannot be said to be a comparable. We, therefore, direct the TPO to exclude Infosys Limited from the list of comp....
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....mited is functionally different from assessee's case and no segmental information is available and it has high research and development expenditure and intangibles. The learned Departmental Representative submitted that Genesys International Corporation Limited is not a comparable case, being so, the ratio laid down in the case of CGI Information Systems and Management Consultants Private Limited (supra) cannot be applied to assessee's case. 9.2 We have heard the rival submissions and perused the material on record. In the present case, CGI Information Systems and Management Consultants Private Limited and assessee are in the business of software development and it cannot be said that the case of CGI Information Systems and Management Consultants Private Limited cannot be considered as a comparable to assessee's case. Therefore, the ratio laid down in the case of CGI Information Systems and Management Consultants Private Limited (supra) is squarely applicable to the assessee's case. As rightly pointed out by the learned AR, Genesys International Corporation Limited is engaged in providing Geographical Information Services comprising of Photogrammetry, Remote Sensing, Cartogra....
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....ue." 10.1 On the other hand, the learned Departmental Representative pleaded that the issue may be remitted to the Assessing Officer for fresh consideration. 10.2 We have heard the rival submissions and perused the material on record. We find that this issue was considered by the Bangalore Bench of the Tribunal in the case of Applied Materials India Pvt. Ltd. v. ACIT [IT(TP)A No.17/Bang/2016 - order dated 21.09.2016], wherein the Tribunal held as under:- "9.3.3 We have considered the rival submissions as well as the relevant material on record. The co- ordinate bench of this Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. (supra) has considered the comparability of this company in para 27 to 29 as under: "(5) Sasken Communication Technologies Ltd. 27. The assessee raised objection that this company has revenue from software services, software products and other services. The DRP has come to the conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables. 28. We have heard the ld.DR as wel....
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....acts of this issue are that the argument of the assessee before the DRP is that the stock-based compensation plans were introduced by the ultimate holding company NXP Semiconductors N.V. in 2007 wherein certain employees of NXP India have been granted options and restricted stock units under these plans. In line with the Guidance Note on 'Accounting for employee share based payments' issued by the ICAI, the Company measures and discloses the stock compensation cost relating to employee stock options using the fair value method. The compensation cost is amortised over the vesting period of the options. Accordingly, the Company has recorded compensation cost for all grants made to its employees by the ultimate holding Company using the fair value based method of accounting. The provision for compensation cost recognized for the year ended 31st March, 2012 is Rs. 65,23,426. The said provision, being incurred during the normal course of the business, has been considered as an allowable expenditure for the purpose of computation of income. The assessee further argued that during the F.Y. 2014-2015, the assessee has reversed the said provision for compensation cost which has been o....
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....ting. Therefore, by corollary the income becomes taxable at the time of vesting itself. Therefore, two situations arise. (a) First, the assessee has not considered the `perquisite amount at the time of vesting' as salary income of the employee and has not deducted tax on the same. In such a situation the expenditure is to be disallowed by the AO u/s 40(a)(ia) of the Act. (b) Second, the assessee has considered `perquisite amount at the time of vesting' as salary income of the employee and has deducted tax on the same. In such a situation, the expenditure is to be allowed by the AO. 15. Aggrieved, the assessee is in appeal before us. 16. We have heard the rival submissions and perused the material on record. We find that similar issue came up for consideration before the Hon'ble Supreme Court in the case of CIT v. Infosys Technologies Limited [(2008) 297 ITR 167 (SC)], wherein it was held as under:- "There is also no merit in the contention advanced on behalf of the Department that s.17(2)(iiia) inserted by Finance Act, 1999 w.e.f. 1st April, 2000 was clarificatory and, therefore, retrospective in nature. Unless a benefit / receipt is made t....
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.... under the head "salaries". The stock was non-transferable and the stock exchange was also accordingly notified. This is where the weightage ought to have been given by the AO to an important factor, namely, lock-in period. This has not been done. It is important to bear in mind that if the shares allotted to the employee had no realizable sale value on the day when he exercised his option then there was no cash inflow to the employee. It was not possible for the employee to know the future value of the shares allotted to him on the day he exercises his option. Even the cost of acquisition as "nil" came to be introduced in the 1961 Act by the Finance Act, 1999 only w.e.f. 1st April, 2000. In fact, the later deletion of cl. (iiia) is an indicator of the ineffective charge. For the aforestated reasons, the Department had erred in treating Rs. 165 crores as a perquisite value for the asst. yrs. 1997-98, 1998-99, 1999-2000. During those years, the fifth anniversary had not taken place and, therefore, it was not possible for the assessee company to estimate the value of the perquisite during that period. It was not open to the Department to ignore the lock-in period. Therefore,....
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....inter-alia on the following grounds: That on the facts and circumstances of the case and in law: General Grounds 1.The impugned order and directions of the Hon'ble DRP are based on incorrect appreciation of facts and wrong interpretation of law and therefore, are bad in law; 2.The learned AO I Transfer Pricing Officer ('TPO") has erred in assessing the total income at INR 329,987,557 as against the returned income of INR 241,671,830 computed by the Appellant in its return of income for AY 2013-14; 3.The learned AO has erred in law and in fact, in determining a sum 01 INR 29,337,140 as the balance tax demand payable by the Appellant; Transfer Pricing grounds 4.Rejecting the transfer pricing study undertaken by the Appellant and making an adjustment by conducting a fresh economic analysis for the software development transaction 4.1 The learned DRP/AO/TPO erred in making an addition of INR 74,695,457 to the total income of the Appellant on account of adjustment in the arm's length price ("ALP") of the provision of software development services transaction entered by the Appellant with its associated e....
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....jecting the following comparables identified by the Appellant using export sales turnover greater than 75% of sales as a comparability criterion: * Goldstone Technologies Limited by rejecting the following comparable identified by the Appellant using non availability of financial data for financial year 2012-13 as a comparability criterion: *Caliber Point Business Solutions Limited *Maveric Systems Limited f)by rejecting certain comparable companies, on the ground that there were extraordinary circumstances; *Spry Resources India Private Limited *Hellos & Matheson Information Technology Limited g) by rejecting certain comparable companies selected by the Appellant in its TP documentation on the ground that they are functionally dissimilar; *Akshay Software Technologies Limited *Cat Technologies Limited *Cigniti Technologies Limited *Lucid Software Limited *Sasken Communication Technologies Limited 5.3 The learned DRP/AO/TPO has erred in law and facts by erroneously computing the margins of the comparable companies for the Appellant's international transaction of ....
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.... AR also pressed the inclusion of the following seven comparables:- (i) Caliber Point Business Solutions Limited (ii) Helios & Matheson Information Technology Limited (iii) R Systems International Limited (iv) Akshay Software Technologies Limited (v) Cat Technologies Limited (vi) Cignity Technologies Limited (vii) Lucid Software Limited. 19. The facts of the case are that the assessee in the earlier assessment years engaged in the following activities:- Strategic Management Functions: NXP Netherlands plays a significant role in determining the business strategy of the group (including NXP India). NXP Netherlands is responsible for all top management functions of corporate strategy, treasury, legal and regulatory affairs and designing the policy with respect to its group operations (including NXP India) No strategic functions are performed by NXP India. NXP India primarily performs the tactical managerial functions regarding day to day management of business. Corporate services: With respect to human resources, financial management, routine administration etc. NXP ....
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....ating Profit 76145483 OP/OC 7.40% OP/OR 6.89% The segmental financial as given in the Transfer Pricing study is as under:- Particulars Software development services (A) Order gathering services (B) Unallocated (C) Total = (A+B+C) As per P&L (FY 2012- 13) Income Income from service 1004090591 95537256 -- 1099627847 1099627847 Foreign exchange fluctuations 6017675 -- -- 6017675 6017675 Other operating income 371878 -- -- 371878 371878 Non-operating income -- --- 153868263 153868263 153868263 Operating Revenue 1010480144 95537256 153868263 1259885663 1259885663 Expenditure Employee costs 558991583 41794934 -- 600786517 600786517 Operating and other expenses 328904402 10048722 65985925 404939049 404939049 Depreciation and amortization 23110659 663814 -- 23774473 23774473 Non-operating expenses -- -- 1802982 1802982 1802982....
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....ned, our attention was drawn to the decision of ITAT Hyderabad Bench in the case of M/s. EPAM Systems (I) P. Ltd. v. ACIT, ITA No.2122/Hyd/2017 for AY 2013-14, order dated 20.11.2017. Vide para 12 of the decision, the Tribunal took the view that Persistent Systems Ltd. was into software products and software solutions and no segmental details were available and therefore the profit margin in the software development services segment could not be compared with the assessee's profit margin. As far as L&T Infotech Ltd. is concerned, the Tribunal vide para 17 of the aforesaid order came to a similar conclusion to hold that L&T Infotech should not be regarded as a comparable company. In the light of judicial precedents which remain uncontroverted, we are of the view that the aforesaid two comparable companies should be excluded from the list of comparable companies." 22.1 It was also brought to our notice that in earlier year, Larsen & Toubro Infotech Limited has incurred expenditure on "cost of brought out items for resale at Rs. 27,10,89,274 for which he drew our attention to the financial statement of Larsen & Toubro Infotech Limited placed at paper book page No.1081, which is abs....
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....ng the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly." 13.4.2 Following the decision of the co-ordinate bench of this Tribunal in the assessee's own case (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different (viz. being engaged in product development and product design services) from the assessee in the case on hand which is rendering software development services. It is ordered accordingly." 23.1 Therefore, Persistent Systems Limited cannot be compared with the assessee's case. Accordingly, we direct the TPO to exclude the said company from the list of comparables, with the similar directions given in the above order of the Tribunal (supra). III. C G VAX SOFTWARE & EXPORTS LIMITED 24. The learned AR submitted that this ....
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....l details, we find that the assessee and the CG-Vak Software and Exports Limited are not comparables. Therefore, we are inclined to uphold the orders of the authorities below in rejecting this company as a comparable. We direct accordingly." 24.2 In our opinion, there is force in the argument of the learned AR. M/s.C G VAX Software & Exports Limited is not only engaged in the business of computer software development, but also engaged in product manufacturing process, whereas the present assessee is not in product manufacture activity. M/s. C G VAX Software & Exports Ltd. owns huge intangible assets and also engaged in outsourced product development. In view of the foregoing reasons, we hold that the said company cannot be considered for inclusion in the list of comparables. We, therefore, direct the TPO to exclude the said company from the list of comparables. IV. ICRA TECHNO ANALYTICS LIMITED 25. The learned AR submitted that ICRA Techno Analytics Limited is functionally different from that of the assessee. The learned AR drew our attention to paper book page Nos.1317 and 1318 to show that its revenue from services is at Rs. 1807.37 lakh for the period 01.04.2012 to 31.0....
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....arned Departmental Representative, on the other hand, submitted that there is no specific finding by the DRP on this issue, hence, this should go back to the TPO for reconsideration. 27.2 We have heard the rival submissions and perused the material on record. We find that, at the time of transfer pricing study, the data of Tech Mahindra Limited were not available to the public domain. Now these details are available with the assessee. These details were not made available either before the TPO or before the DRP. In view of the variation between the activity of the assessee and Tech Mahindra Limited, we remit the issue to the files of the TPO for reconsideration. It is ordered accordingly. 28. The learned AR pleaded for the inclusion of the following seven comparables:- (i) Caliber Point Business Solutions Limited (ii) Helios & Matheson Information Technology Limited (iii) R Systems International Limited (iv) Akshay Software Technologies Limited (v) Cat Technologies Limited (vi) Cignity Technologies Limited (vii) Lucid Software Limited. I. CALIBER POINT BUSINESS SOLUTIONS LIMITED 29. The assessee selected thi....
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....pport services and I.T. enabled services. However, this company is engaged in providing professional services, implementation, support and maintenance of ERP products and other services. These are nothing but software development services, as is evident from Notes forming part of the financial statement, which is placed at paper book page No.1825. Further, the revenue from software services accounts for 99.45% of the total revenue of the company as evident from the financial statement placed on record at paper book page No.1831. Being so, we direct the TPO to consider this company as comparable to the assessee's case while selecting the comparables. V. CAT TECHNOLOGIES LIMITED 33. This company was rejected by the TPO for the reason that it is engaged in quality consultancy services in system analysis, system design and other related services. According to the TPO, it was functionally different from the assessee, and rejected the said company from the comparables. As seen from the Notes relating to statement of profit and loss account as on 31.03.2013, along with sales and services as under:- Particulars As on 31.03.2013 (Rs.) Sales & Services EXPORT &....