TaxTMI 
TaxTMI 
TaxTMI 
2020 (5) TMI 86
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....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 Pricing grounds 4. The Hon'ble DRP has erred in, law and facts, by upholding the stand of lear....
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....ellant 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 13,759,456 under section2 234B and INR 797,664 under section 234C of the Act. 16. The Hon'ble DRP erred in upholding the action of the learned AO in levying interest under section 234D of the Act; 17. The lear....
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....es 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 number 20, the Petitioner hereby wishes to introduce ground number 21 as under: 21. "Sasken Communications Technologies Limited were chosen as comparable in transfer pricing study, however upon availability of more details in public domain, this company is found to be not comparable and should be excluded from the finals ....
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.... 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 Services Limited (ii) Genesys International Corporation Limited (iii) ICRA Techno Analytics Limited (iv) Infosys Limited (v) Larsen & Toubro Infotech Limited (vi) Mindtree Limited (Segmental) (vii) Persistent Systems Limited (viii) R.S.Software (India) Limited (ix) Sasken Communication Technologies Limited (x) Spry Resources India Private Limited. 5.2 The TPO made transfer pricing adjustment of Rs. 8,36,07,533. However, the Dispute Resolution Panel....
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....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 within a fixed time and budget. Persistent Systems has emerged as a leader in the OPD segment - a segment which is fast growing. OPD and outsourced IT services: the difference. How is OPD different from outsourced IT services is an oft asked question. In IT services, projects start with well-defined requirements, and vendors use time and money as variables to arrive at a reasonable cost estimate for the project. After completion, the project goes into maintenance mode. In product development, requirements are less clearly defined. Instead, most product developers are given ship-dates for the ....
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.... 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 and placed reliance upon. We find that a coordinate bench of the Tribunal in the case of Cisco Systems Services B.V., India Branch (supra), for Assessment Year 2009- 10 had held that this company be excluded from the final set of comparables on the ground that it is functionally dis-similar and different from a purely software service provider and at para 20 of the order has held as under :- "20. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering ....
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.... 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 generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Repr....
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....6,286 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 comparables. GENESYS INTERNATIONAL CORPORATION LIMITED 9. The learned AR submitted that Genesys International Corporation Limited was not considered as a comparable in the case of CGI Information Systems and Management Consultants Private Limited in IT(TP)A No.586/Bang/2015 - order dated 11.04.2018, by observing as under:- "35. We have given a careful consideration to the rival submissions. It-is clear from the material brought to the notice of the TPO by the Assessee that this. company renders mapping and geospatial services. In rendering such services it develops software. But that "does not mean that this company is in the business of software development. The business profile of this company as per the annual report does not show that th....
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....rable 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, Cartography, Data Conversion, state of the art terrestrial and 3D geo-content including location based and other Computer based related services. Being so, it is functionally different from assessee's case. Further, no segmental information is available. It has given gross revenue from GIS services at Rs. 95,98,72,089 and there is high research and development expenditure incurred as on 31.03.2012 at Rs. 10,64,10,464. Intangible is very high and also have high brand value as evidence the financial statement page 1204 to 1237. Being so, this company cannot be considered as a comparable company. We, therefore, direct the TPO to exclude it from the list of comparables. SASKEN COMMUNICATION TECHNOLOGIES LIMITED 10. The learned AR submitted that this company is engaged in the development of software products a....
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....pany 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 well as ld.AR and considered the relevant material on record. The DRP has reproduced the break-up of revenue in the impugned order as under:- Rupees in lakh. Year ended on 31st March, 2010 Year ended on 31st March, 2010 Software services 37,736.22 40,531.20 Software products 2,041.00 6,146.4 Other services 372.77 1,297.05 Total revenues 40,150.89 47,974.68 29. Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP." We further note that the DRP has not adjudicated the obj....
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....f 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 offered to tax in F.Y.2014-15 (in the return of income) since the provision created earlier was claimed by the company. The assessee has also relied on the Special Bench decision of the ITAT Bangalore Benches in the case of Biocon. 14. The DRP was of the view that there are four stages in the grant of the ESPO, viz., (i) Granting of option, (ii) Vesting of option, (iii) Exercise of option, and (iv) Selling shares. Normally, the ESOP is designed in such a way that there is a gap of one or more years between each of the first three stages. The decision relied upon by the assessee in the case of Biocon also holds that the expenditure is allowable at the time of vesting. Since this is position as per the Biocon decision, then the same becomes taxable in the hands of the employees. What has not been brought before and therefore not considered by the Special Bench in this case is that when the same amount becomes taxable in the hands of the e....
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....ention 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 taxable, it cannot be regarded as "income". This is an important principle of taxation under the 1961 Act. Applying the above principle to the insertion of cl.(iiia) in s.17(2) one finds that for the first time w.e.f. 1st April, 2000 the word "cost" stood explained to mean the amount actually paid for acquiring specified securities and where no money had been paid, the cost was required to be taken as nil. The mechanism introduced for the first time under the Finance Act, 1999 by which "cost" was explained in the manner stated above was not there prior to 1st April, 2000. The new mechanism stood introduced w.e.f. 1st April, 2000 only. With the above definition of the word "cost" introduced vide cl. (iiia), the value of option became ascertainable. There is nothing in the Memorandum to the Finance Act, 1999 to say that this new mechanism would operate retrospectively. Further, a mechanism which explains "cost" in the manner indicated above cannot be read retrospectively unle....
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....fore, 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, the Department had erred in treating the respondent herein as an assessee in default for not deducting the TDS at 30 per cent as stated in the order of assessment. Estimation of TDS under s. 192 in the absence of clear provisions on valuation of "perquisite" in this case would not justify the Department in treating the respondent as assessee in default. Therefore, the AO and the CIT(A) had erred in treating the respondent as defaulter for not deducting TDS under s. 192. Consequently, ss.201(1) and 201(1A) were also not applicable to the facts of this case - CIT v. Infosys Technologies Ltd. (2007) 207 CTR (Kar) 620 affirmed." 16.1 However, they have not pressed any opinion on the law prevailing after 1st April, 2000. Being so, the above ratio laid down by the Hon'ble Supreme Court cannot be applied for the assessment year 2011-2012. There was an amendment to section 17(2)(iiia) with effect from 01.04.2000, however, the same was deleted by the Finance Act, 2000 with effect from 01.04.2001. Being ....
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....vision of software development services transaction entered by the Appellant with its associated enterprise; 4.2 The learned DRP/AO/TPO has erred in law and facts by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ("Rules") and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length; 5.1 The learned DRP/AO/TPO has erred in law and facts by determining the arm's length marginal price using only FY 2012-13 data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements; 5.2 The learned DRP/AO/TPO erred, in law and in facts, by accepting/rejecting companies based on unreasonable comparability criteria: a)The learned DRP/AO/TPO erred, by accepting certain additional comparable companies by conducting a fresh independent search during TP assessment proceedings which are functionally dissimilar; * Tech Mahindra Ltd (Segmental) b)The learned DR....
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....d *Persistent Systems Limited *Larsen and Toubro Infotech Limited *Mindtree limited (Segmental) 5.4 The learned DRP/AO/TPO erred, in law and in facts, by obtaining information u/s 133(6) of the Act, which was not available in public domain and relying on the same for comparability purposes; * Tech Mahindra Ltd (Segmental) 5.5 The learned DRP/AO/TPO erred, in law and in facts, by incorrectly computing the working capital adjustment of certain comparable companies. 5.6 The learned DRP/AO/TPO erred, in law and in facts, by not making suitable adjustments on account of differences in the risk profile of the Appellant vis-a-vis the comparables, while conducting comparability analysis; Corporate Tax Grounds 6. The learned AO has erred in facts disallowing the stock compensation expense amounting to Rs. 16,512,330 under Section 37 of the Act without appreciating the fact that, the same has been suo moto disallowed by the assessee in the computation of income for the current AY. The learned AO erred in facts, by increasing the total income by INR 2,892,060 being the consequential depreciation allowed to the Appellant, instead of reducing the same Other Grounds 8.The....
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....erseas entities in terms of implantation of those policies. Marketing/Business Development: NXP Netherlands formulates the overall marketing strategy and is responsible for marketing the products/services offered by NXP Netherlands. As NXP Netherlands is the front end contact for the customers, it undertakes lead generation, marketing and sales activity for the products/services provide to the customers. It is responsible for maintaining and developing relationship with its customers and is therefore responsible for expanding the business. NXP India does not undertake any marketing/business development activity. Functions in respect of Sales agent Support Services: *Marketing Strategy *Developing marketing and sales collaterals *Advertising and sales promotion *Assistance in identifying customers in India *Pricing decision *Contracting with customers and invoicing ANALYSIS OF FINANCIAL RESULTS: Financial results for the F.Y.2012-13 as per the Profit & Loss Account:- Particulars Amount (Rs.) Income Revenue from operations Income from research design & application development services 1004090591 Income from indenting activity 95537256 &n....
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.... 25 comparables. However, the A.O. considered only 4 out of it and limited the comparables to the extent of 7 and computed the margin at 19.08% by considering following comparables:- (i) C G VAK Software & Exports Limited (ii) Larsen & Toubro Infotech Limited (iii) Mindtree Limited (iv) Persistent Systems Limited (v) R S Software (India) Limited (vi) ICRA Techno Analytics Limited (vii) Tech Mahindra Limited. 20.1 Thus, the TPO made transfer pricing adjustment to the tune of Rs. 7,46,95,457 without making any adjustment on account of risk. The assessment went for the direction of the Dispute Resolution Panel (DRP), who concurred with the view taken by the TPO on selection of the comparables and also concurred with the view with regard to working capital adjustment and risk adjustment. Therefore, the assessee is before us. 21. The learned AR pleaded for the exclusion of the following comparables:- (i) Larsen & Toubro Infotech Limited (ii) Persistent Systems Limited. (iii) C.G.VAK Software & Exports Limited (iv) ICRA Techno Analytics Limited (v) Tech Mahindra Limited. I. LARSEN & TOUBRO INFOTECH LIMITED 22. The learned AR relied on the order of the co-ordin....
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.... under the head "Revenue from operations (net)", placed at paper book page No.1260 and it has net income from sale of software services as discussed in earlier year. It is also to be noted that Persistent Systems Limited is considered as a comparable by various orders of the Tribunal in the following case of NXP Semiconductor Private Limited [IT(TP)A No.1634/Bang/2014 for assessment year 2009-2010. Vide order dated 22.07.2015, the Tribunal observed as under:- "13.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that a co-ordinate bench of this Tribunal in the assessee's own case (supra) for Assessment Year 2008-09 has held that this company being engaged in product development and product design and analysis service is functionally different from a pure software service provider and therefore excluded it from the list of comparables for software development services; holding as under at para 17.3 of its order:- "17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Per....
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....ited (ITA No.2122/Hyd/2017 for assessment year 2013- 2014). Vide order dated 20.11.2018, the Tribunal held as under:- "16. Having regard to the rival contentions and the material on record, we find that the assessee has raised its objections before 10 the TPO but he held that it is functionally similar. We have gone through the annual reports of CGVAK Software & Exports Ltd and find that the said company is having revenue from both software services and BPO services but there is no segmental data with regard to each of these transactions. Therefore, as held by the Coordinate Bench of the Tribunal in a number of cases (cited supra), we hold that this company cannot be taken as a comparable to the assessee-company. Accordingly, we direct the TPO to exclude this company from the final list of comparables." 24.1 Similarly, in the case of M/s.ION Trading India Private Limited v. ITO (ITA No.1035/Del/2015 for the assessment year 2010-2011). The Tribunal vide its order dated 07.12.2015, held as under:- "21. We have considered the submission of the ld. counsel for the assessee and have considered the argument of the ld. DR that the assessee is not producing any product, however, we fi....
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....ble, and therefore, it may be remitted back to recompute the margin. 26. We have heard the rival submissions and perused the material on record. In our opinion, as rightly pointed out by the learned DR, the assessee has not objected for considering ICRA Techno Analytics Limited as a comparable before us and the only challenge was with regard to computation margin of the comparable. In view of this, we are inclined to remit the matter to the files of TPO to compute the correct margin of this comparable company. Accordingly, we remit the matter to the TPO with the above directions. V. TECH MAHINDRA LIMITED 27. The contention of the assessee is that in case of Tech Mahindra Limited the TPO has obtained information about its comparability u/s 133(6) of the I.T.Act, which was not available in public domain, and relied on the same as comparable. According to the learned AR, the intangible and inventory is very high and Tech Mahindra Limited is functionally different from that of the assessee. The learned AR further submitted that Tech Mahindra Limited provides variety of services like business support systems, operations support systems, mobility solutions, network design and engineer....
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.... on 31st September, which is different when compared to that of the assessee's case. There is no dispute that this company is engaged in business of software development services. This company is considered to be comparable though it has different financial year, as held in the following cases:- (i) RR Donnelley India Outsources Pvt. Ltd. [ITA No.678/Mds/2015] (ii) Mckinsey Knowledge Centre India Private Limited [ITA No.217/Del/2014] (iii) Techbooks Electronics Services v. Pr.CIT [ITA No.343/Del/2017] 30.1 Being so, in our opinion, an extrapolated data can be considered so as to determine the data for the relevant financial year 2012-2013. Accordingly, we remit this issue to the file of the TPO for fresh consideration. III. R.SYSTEMS INTERNATIONAL LIMITED 31. This company has been rejected by the TPO on the reason that this company has different year ending as compared to that of the assessee company. As discussed in earlier paragraph, there is no dispute that R.Systems International Limited is functionally comparable to the assessee. Being so, as held in earlier paragraph, we direct the TPO to consider this company as a comparable. IV. AKSHAY SOFTWARE TECHNOLOGIES LIMITE....