TaxTMI 
TaxTMI 
2020 (5) TMI 235
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....tive and quantitative filters adopted by the TPO. iii) Whether the Hon'ble DRP is right in applying "onsite revenue filter" without appreciating the fact that the function carried out is "Software Development" irrespective of whether onsite or offshore. iv) Whether the Hon'ble DRP in correct in excluding M/s RS Software Pvt. Ltd. and M/s Acropetal Technologies and M/s L&T Infotech ltd on the ground that they have significant onsite revenue without appreciating the fact that onsite development of software entails more cost and thereby results in lower profit margins. v) Whether the Hon'ble DRP was right in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies. vi) Whether the Hon'ble DRP has erred on fact in deleting M/s Einfochips as a comparable on the ground that it fails the filter of service income less than 75% of the sales, when the said company has service income being 100% of the sales. vii) Whether Hon'ble DRP erred in fact in rejecting the company as a compa....
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..../learned TPO/Hon'ble DRP erred in applying export earning filter of 75% instead of 25% of the total sales, leading to a narrow comparable set. 7. The learned AO/learned TPO/Hon'ble DRP erred in applying related party filter of 25% without giving any cogent reason for doing so. 8. The learned AO/learned TPO/Hon'ble DRP erred in not applying the upper limit on turnover while selecting the comparable companies, even while applying the lower limit on turnover. 9. The learned AO/learned TPO/Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies. 10. The learned AO/learned TPO/Hon'ble DRP erred in not considering the provision for bad and doubtful debts as operating in nature. 11.The learned AO/learned TPO/Hon'ble DRP erred in applying onsite filter to reject the companies that are comparable to the Appellant. 12. Software Development Services 12.1. The learned AO/learned TPO/Hon'ble DRP erred in carrying out a fresh search to select comparables without appreciating the fact that the following comparable companies are not comparable to the Appellan....
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....el ('Hon'ble DRP') has erred in rejecting sale of 'wireless division' of the Appellant as slump sale. 15.2. The Learned DRP has erred in concluding that provision of section 50B are not applicable to the Appellant without giving any reasons. 15.3. The learned AO and Hon'ble DRP has erred in contending that all assets and liabilities of the wireless division are not transferred to qualify as 'slump sale' including cash and cash equivalents, bank deposits etc. 15.4. The learned AO and the Hon'ble DRP ought to have appreciated that there is no separate cash ledger and bank accounts maintained for wireless division and the same are maintained at entity level. 15.5. The learned AO and the Hon'ble DRP has failed to appreciate that there are no intangible assets nor any secured/unsecured loans. 15.6. The Learned AO and the Hon'ble DRP has failed to appreciate that the law does not require that all assets are required to be transferred and only a collection of assets and liabilities which constitute a separate business activity and allows the buyer to carry out business independently would suffice. ....
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.... 15.16. The learned AO and the Hon'ble DRP has erred in computing net worth of the undertaking, i.e., wireless division as per the valuation report furnished by the Buyer and not based on documents, Form 3CEA submitted by the Appellant. 15.17. The learned DRP erred in holding that the case laws relied by the Appellant as regard to the issue of slump sale is distinguishable on the reason that Form 3CEA does not certify the correctness of the net worth and that the difference between the BTA and valuation report obtained by the buyer has not been explained by the Appellant. 15.18. The learned AO and the Hon'ble DRP has erred in holding that the leasehold improvements and computers older than 2 years would not have any value as on date of the transfer. 15.19. The learned AO and the Hon'ble DRP has further erred in holding that the valuation report is on 'as-is-where-is' basis. 15.20. The learned AO and the Hon'ble DRP has erred in not including the values of excluded assets (which are not part of valuation report) for the purposes of net worth computation. 15.21. The learned AO and the Hon'ble DRP has erred in h....
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....arned AO pursuant to the DRP directions. 16.3. The learned AO and the Honle DRP has failed to appreciate that with respect to the other transactions, which are towards equipment purchased with inbuilt software; bifurcation of which is not possible and software received in media that amounts to goods, cannot be subject to withholding of taxes. 17. Interest under section 234B of the Act 17.1. The learned AO erred in levying interest under section 234B of the Act which is consequential in nature. 18. Interest under section 234C of the Act 18.1. The learned AO erred in levying interest under section 234C of the Act on the assessed income, where such interest is to be computed on the returned income and not on the assessed income. The Appellant craves to leave to add, to alter, to amend, to rescind or to modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing this appeal. For the above and any other grounds which may be raised at the time of earning, it is prayed that necessary relief may be provided. Brief facts of the case are as under: 2. Assessee is a compan....
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....ited (Seg) 24.72% Average 13.71% Marketing support service segment S.No Company name Margins 1 Concept Comiminication Limited 2.81% 2 Cyber Media India Online Limited (merged) 19.98% 3 Gradiente Infotainment Limited 4.16% 4 Marketing Consultants & Agencies Limited 8.58% 5 Quadrant Communications Limited 10.99% 6 Sporting & Outdoor Aad-Agency Private Limited 2.80 Average 8.22% 7. Ld.AO was of the opinion that, comparables used by assessee do not pass its own filters and that data used in computing arm's length price is not reliable and correct. Ld.TPO thus proceeded to determine arm's length price by conducting independent search for comparables, considering new set of filters. Ld.TPO selected following comparables under both segments Software Development Service Segment S.No Name PLI 1 Acropetal Technologies Ltd.(seg) 31.98% 2 e zest solutions 21.03% 3 E-infochips Ltd 56.44% 4 Evoke 8.11% 5 ICRA Techno Analytics Ltd. 24.83% 6 Infosys Ltd 43.39% Marketing support service segment S.No Name of the Company ....
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.... mentioned in Ground 12.1 and 12.2. Assessee also seeks inclusion of RS software (India) Ltd. 15. For Marketing Support Services, assessee seeks exclusion of Asian Business Exhibition & Conferences Ltd., under ground 13.1 and, inclusion of concept communication Ltd., and Cyber Media India online Ltd., in Ground No. 13.2. 14. Before we undertake comparability analysis, it is sine qua non to understand functions performed, assets employed and risks assumed by assessee under both these segments. A. Software development service segment: Functions: In TP study at page 724 of paper book, assessee has been stated to be involved in business of software research and development services, that involves designing software to configure hardware, testing of products designed, validation of products tested, debugging operations if required. It has been stated that assessee entered into agreement for providing software services for research, development and testing of various operations and programs. Assessee performs following functions under service agreement and research and development agreement executed with Infeneon Singapore: * Perform research and development an....
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....ied to be a low risk captive service provider providing software research development and market support services only to its associated enterprises. We shall first take up Revenue's appeal. Ground no. (i) - (v) Ld.CIT.DR submitted that DRP applied on-site revenue filter selectively, instead of applying in respect of all comparables. It has been argued that application of a filter determines what set of comparables would be displayed on database, on which search is carried out. Application of filter to shortlist companies under a particular segment is 1st step to conduct transfer pricing analysis. She vehemently argued that, once comparables are shortlisted by Ld.TPO, DRP cannot suo moto apply "on-site revenue filter" subsequently and exclude comparables, which is not as per procedures laid down under law. Ld.CIT.DR submitted that "on-site revenue filter" applied by DRP is, neither applied by assessee in transfer prising study, nor considered by Ld.TPO, while conducting analysis under section 92CA of the Act. Placing reliance upon decision of this Tribunal in case of ACIT vs Broadcom Communication Technologies Pvt. Ltd., reported in (2017) 88 Taxmann.com 309, he submitt....
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....ur considered opinion, these grounds raised by revenue becomes academic 8.6. Decisions relied upon by Ld.CIT DR of Delhi Tribunal in case of DCIT vs Vertex customer services in ITA No.5228/Del/2018 (supra) and Aircom International India Pvt. Ltd., (supra) does not deal with on-site revenue filter as has been submitted by Ld.CIT DR. 8.7. On merits, Ld.CIT DR relied upon decision of coordinate bench of this Tribunal in case of Mercedes-Benz Research and Development India Pvt Ltd., vs ACIT reported in (2018) 90 Taxmann.com 300 and submitted that these comparables were sent back to Ld.TPO for re-examination. She thus submitted that, view taken by coordinate bench of this Tribunal in Mercedes-Benz Research and Development India Pvt. Ltd., vs ACIT (supra) may be followed. 8.8. We have perused view of coordinate bench of this Tribunal in case of Mercedes-Benz Research and Development India Pvt. Ltd., (supra) in respect of Accropatel Technologies Ltd and L&T Infotech Ltd. It is observed that these comparables were sent back to Ld.TPO by observing as under: Acropetal Technologies Ltd. ('Acropetal') ........ 13.3.1 We have heard t....
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....m the list of comparable companies. 16.4 Per contra, the learned Departmental Representative for revenue objected to the admission of this additional ground stating that when the assessee itself has selected these two companies, the authorities below had no occasion to consider the objections now raised by the assessee before the Tribunal. 16.5 After having heard both parties and perused and considered the material on record, we find that the functional comparability of these two companies i.e. (i) L & T Infotech Limited and (ii) Sasken Communication Technologies Limited have been considered by benches of this Tribunal in various cases, including those cited by the ld.AR. By way of this additional ground, the assessee is raising objections to the inclusion of these companies on the issue of functional dissimilarity and other grounds. In our considered view, the assessee cannot be precluded from raising an objection against inclusion of a company even if the said company was selected by the assessee in its TP Study. This view was taken by the Special Bench of ITAT, Chandigarh in the case of Dy. CIT v. Quark Systems (P.) Ltd.[2010] 38 SOT 307. As per the principles ....
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.... service provider, working on a cost plus business model. Ld.TPO is directed to consider RS Software Ltd. in final list Accordingly, Ground no. (i) - (v) stands partly allowed. Ground No. (vi) is in respect of excluding M/s.E-Infochips, by DRP as comparable on the ground that it fails service income filter. Ld.CIT DR submitted that TPO while analysing comparables observed that this company has revenue from software development up to 88% and therefore included, whereas DRP observes that revenue earned by this company is less than 75% and thus excluded. She submitted that, basis of determining revenue by DRP being less than 75% has not been demonstrated and therefore needs to be reconsidered. Ld.AR, on the other hand placed reliance upon decision of coordinate bench of this Tribunal in case of Autodesk India Pvt Ltd. vs ACIT (supra) wherein, E- Infochips Ltd was excluded for failing service income filter. We have perused submissions advanced by both sides in light of records placed before us. We have referred to the decision of this Tribunal in case of Hewlett Packard India Software Operations (P) Ltd vs DCIT (supra) relied upon by both sides. It is noted that DRP h....
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....by this Hon'ble Tribunal. Even otherwise, we are of the view that the DRP rightly arrived at the finding that companies software development service revenue for FY 2010-11 was less than 75% of its total operating revenue for the year. Thus the above action of the DRP in rejecting the above companies correct." 9.3. In the facts before us, revenue is challenging exclusion of this comparable as DRP recorded finding in respect of service income being less than 75%. Other issues considered by DRP in respect of extraordinary event and no segmental information is available has not been challenged before us (page 11 of DRP order). Respectfully following the view taken by coordinate bench of this Tribunal in DCIT vs M/s.CGI Information Systems and Management Consultations Pvt.Ltd (supra), we direct Ld.TPO to exclude this company." Admittedly, manner in which DRP passed directions in respect of alledged comparables in these grounds are similar and identical to decision of this Tribunal in case of Hewlett Packard India Software Operations (P) Ltd vs DCIT (supra) relied upon by both sides. It is also noted that both assessee as well as Hewlett Packard India Softwa....
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....rary supported view of authorities below and opposed exclusion. We have perused submissions advanced by both sides in light of the records placed before us. It is observed that annual report of this company is placed at - page 777- 972 of paperbook pertaining to Annual Reports wherein, Schedule 15 forming part of profit and loss account shows income from sale of software services and products, however there is no separate segmental information in respect of these 2 segments. Thus it is clear that this company is earning revenue from activities which includes licensing of products, royalty on sale of products as well as income from maintenance contracts etc which could not be considered functionally similar with that of assessee holders only carrying out software development service at the behest of its AE's on a captive basis. Similar view has been taken by this Tribunal in case of DCIT vs Electronics for Imaging India Pvt.Ltd (supra). Respectfully following the same we direct Ld.AO/TPO to exclude this company from the final list. c) Sasken Communication Technologies Ltd Assessee seek exclusion of this comparable for the reason that it is engaged in development of....
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....o Ld.AO/TPO to verify whether this comparable is functionally similar to assessee in the service segment. In the event it is found to be functionally similar to assessee Ld.AO/TPO is directed to recompute segmental margins of this comparable in accordance with law for considering it in the final list. Needless to say that proper opportunity of being represented shall be granted to assessee. Accordingly this comparable is set aside to Ld.AO/TPO. Market Support Service Segment Ground No.13.1 is for exclusion of Asian Business Exhibition & Conferences Ltd. Ld.AR raised objection regarding functional comparability of this comparable with assessee. It has been submitted that this company derives revenue from sale of stall space in exhibition and events, commission due to advertisement insertions in external publications, sponsorship, delegate fees and income from entry charges vis-à-vis, assessee, which is engaged in provision of marketing support services to its associated enterprises. Ld.AR submitted that learnt TPO wrongly re-characterised assessee's functions to be in building awareness about the product by conducting exhibition, road shows, conference, customary ....
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....rities below have not analyse similarities/dissimilarities in FAR of this comparable with assessee. We accordingly set aside this comparable back to Ld.AO/TPO verify the same. Needless to say that proper opportunity of being represented shall be granted to assessee. Accordingly this comparable is set aside to Ld.AO/TPO. Accordingly this ground raised by assessee stands allowed for statistical purposes. Ground No.14 A-B: Working capital adjustment Ld.AR submitted that Ld.TPO erred in restricting working capital adjustment to 1.63% which is average cost of capital of comparable companies selected by Ld.TPO. It has been submitted that no basis has been provided by Ld.TPO in determining working capital adjustment at 1.63%. Ld.AR also submitted that upholding working capital adjustment being restricted at 1.63% is against view taken by various decisions of this Tribunal. He submitted that Ld.TPO is duty bound to give adjustment based on difference in economic, geographical condition, compared with that of assessee in actual is without any. He placed reliance on various decisions of coordinate bench of this Tribunal where, Ld.TPO is directed to provide working capital adjustm....
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....arries out research development design and validation and certification of the product specific information which was sold to Intel mobile communications private limited for a lump sum consideration of Rs. 98,57,41,680/- as a going concern basis. Assessee treated the resultant gain arising on slump sale as long term capital gain as undertaking was held for a period of more than 36 months and consequently offered the same to tax under section 50 B of the act for year under consideration. Ld. AO while passing assessment order rejected the gain on sale of wireless division as slump sale for following reasons: * according to Ld.AO transfer of wireless division was not slumped sale as all assets and liabilities were not transfer. * Ld.AO observed that assets such as cash, bank deposits, proprietary information, tangible assets, work in progress, semifinished goods, inventory etc and liabilities such as loan, creditors, employee liabilities etc were not transferred to the buyer. Ld.AO placed reliance on the decision of Mumbai Tribunal in case of Premier Auto Mobiles reported in 34 DTC 279 . * Ld.AO observed that assessee did not file Form 3CEB along with the....
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....to file Form 3CEB, Ld.AR submitted that during the relevant year there was no requirement to file such form electronically. He also submitted that a certification was issued by accountant which is placed at page 2182 however the same has been held to be not correct by authorities below. Ld.AR has further argued that assessing officer erred in considering the value in accordance with the valuation report filed by the buyer. He submitted that the manner in which buyer assigns value to the assets in its books of account cannot be the basis to determined the value of assets in the hands of assessee. It has been submitted by Ld.AR that the buyer has submitted list of assets that has been excluded with Ld.AO which shows that all the assets transferred by assessee has not been considered in the valuation report. He submitted that the valuation adopted by the buyer is not in accordance with the mechanism provided under the Act, to determined the net worth of undertaking. He thus submitted that the mismatch in the valuation adopted by the buyer and the assessee cannot be a reason to hold assessee liable. On the contrary, Ld.CIT.DR submitted that assessee has failed to filed requisite ....
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....ssets and liabilities between the party and instead there is one lump sum value of undertaking. The methodology for determining net worth has been given in Explanation 1 read with Explanation 2 of section 50 B. According to these provisions, aggregate value of total asset is reduced by value of liability of such undertaking. The aggregate value of asset and the value of liability as per Explanation 2, is the written down value of depreciable assets, book value of other assets and the book value of all the liabilities. Thus while computing capital gains from transfer of undertaking it has to be all the assets and all the liabilities. In the details of block wise and itemise assets placed at page 2186-2220 of paper book, we note that assessee has given all details regarding the date of acquisition the cost of acquisition the depreciable value as on the date and the written down value as on the date of slump sale in regards to the assets. Further at page 13 64 of paper book we note that scheduled 10 to Profit and Loss Account being other income, mentions Gain on Sale of assets of wireless division to Intel amounting to Rs. 87,73,82,424/-. Note 18 to scheduled 14 at page 1377 bei....