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2020 (5) TMI 407
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....the order issued by the Ld. AO is bad in law in so far as the fact that the Ld. AO did not issue to Applied Materials India Private Limited ('the Appellant or 'the Company'), a show cause notice as per proviso to section 92C(3) of the Act. 1.2 The Ld. AO has erred in law in making a reference to the Deputy Commissioner of Income Tax (Transfer Pricing) - 1(1)(1) ['Ld. TPO'], inter alia without recording an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. Accordingly, the order passed by the Ld. TPO is without jurisdiction. 1.3 The final assessment order passed by the Ld. AO is without jurisdiction, inter alia, in so far as it purports to give effect to invalid directions of the Dispute Resolution Panel ('Ld. Panel'). 1.4 The order passed by the Ld.AO is without jurisdiction, inter alia, in so far as it incorporates the adjustment proposed in an invalid order passed by the Ld. TPO. 2. The Ld. Panel and Ld. AO/ Ld. TPO has erred in justifying the motive of shifting of profits On the facts and in the circumstances of the case and in law, the Ld. Panel and Ld. AO/....
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....ices by the Appellant with companies operating as full-fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk assumed by the Appellant vis-à-vis the companies selected as being comparable. 5.2 The Ld.AO/Ld.TPO erred in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant without establishing functional comparability and the Ld. Panel also erred in confirming the same. 5.3 The Ld.AO/Ld.TPO erred in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. The Ld. Panel also erred in confirming the same. 5.4 The Ld. Panel erred in upholding the action of the Ld.AO/Ld.TPO in not applying the turnover filter at the upper limit so as to reject the high turnover companies selected by the Ld.AO/Ld.TPO. 5.5 The Ld.AO/Ld.TPO, while applying the said turnover filter at the lower limit so as to reject companies having turnovers less than INR 1 crore in FY 2012-13, erred in not applying the said filter at the upper end so as to reject high turnover companies as well. The Ld. Panel also erred in confirmin....
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....stent Systems Limited and Larsen and Turbo Limited in the list of comparables despite these companies being functionally incomparable to the Appellant. The Ld. Panel erred in confirming the same. 5.15 The Ld.AO/Ld.TPO erred in not appreciating the fact that Larsen & Toubro Infotech Limited and Persistent Systems Limited were held by the Hon'ble Tribunal to be functionally incomparable to the Appellant in the earlier assessment years, i.e. AYs 2010-11 and 2011-12, and that, therefore, they ought to be excluded from the list of comparables for this assessment year as well as they continue to be functionally incomparable to the Appellant. 5.16 In directing the exclusion of Tech Mahindra Ltd. from the list of comparables, the Ld. Panel erred in not accepting the other contentions put forth by the Appellant for exclusion of the said company as well. 5.17 The Ld.AO/Ld.TPO erred in considering Provision for Doubtful Debts as a non-operating item while computing the margins. The Ld. Panel erred in upholding the same. 5.18 The Ld.AO/Ld.TPO erred in considering data obtained u/s 133(6). The Ld. Panel erred in upholding the actions of the TPO. ....
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.... The Appellant submits that based on the facts and circumstances of the case, there was no basis for the Ld. AO to initiate proceedings under Section 274 read with Section 271(1)(c) of the Act. 12. Relief 12.1 The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. 12.2 The Appellant desires leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of objections, at any time before or during the hearing of the Appeal. The Appellant submits that the above grounds are independent of and without prejudice to one another. Brief facts of the case are as under: 2. Assessee is a company and filed its return of income for year under consideration on 29/11/2013 declaring total income of Rs. 37,11,50,990/-. The case was selected for scrutiny and notice under section 143(2) was duly served on assessee calling for various details in connection with the return filed. Representative of assessee appeared before Ld.AO in response to statutory notices and filed various details. Ld.AO observed that assessee had entered into internat....
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....tions greater than 25% of sales - excluded 6 Companies that are functionally different from the taxpayer- excluded 7 Companies which have export sales less than 75% Of the sales- excluded. 8 Companies with employee cost less than 25% of turnover- excluded. 9 Companies having positive net worth- selected 6. Final set of comparables considered by Ld.TPO are as under: S.no. Particulars Margine 1. Akshay Software Technologies Ltd. 20.54 2. Evoke Technologies Pvt.Ltd. 17.10 3. Helios & Matheson Information Technology ltd. 26.06 4. RS Software (India) ltd. 18.19 5. R Systems International ltd. 28.27 6. Sasken Communication Technologies Ltd 17.41 7. Ybrant Digital Ltd. 18.72 AVERAGE MARK -UP 20.90 7. Further, while computing PLI of assessee, Ld.TPO was of the view that subcontracting charges of Rs. 81,29,78,005/- during relevant financial year, paid by assessee to 3rd parties towards provision of software development services, formed part of assessee's operating cost. He thus included subcontracting charges in operating cost, thereby increasing assessee's margin to 15.38%. Ld.TPO....
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....that, assessee wish to press and argue certain grounds. Ld.AR thus restricted his arguments to Ground No. 4, 5.12, 5.14, 5.15, 8 and 9, as under. 11. Ground No. 4: 11.1. This ground relates to the claim of assessee that subcontracting charges paid to 3rd parties should not be considered in the operating profit while computing assessee's margin. Ld.AR submitted that this issue has been considered by this Tribunal in preceding assessment years being assessment year 2011-12 and 2012-13 in assessee's own case, in IT(TP)A No. 17/B/2016 by order dated 21/09/2016 and IT(TP)A No. 1838/B/2016 by order dated 05/02/2020, respectively against assessee. 11.2. Ld.CIT DR placed reliance upon the orders passed by this Tribunal in assessee's own case in preceding assessment years. 11.3. We have perused submissions advanced by both sides in light of records placed before us. It is observed that this issue now stands settled against assessee in assessee's own case wherein this Tribunal decided by making following observations. We refer to and rely upon observations by this Tribunal in assessee's own case for 2012-13 (supra): "10. We heard the learned Departmental Representativ....
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....ts relating to this claim and the consistent view has been taken by coordinate bench in the preceding assessment years. Respectfully following the view taken by this Tribunal in assessee's own case, we reject the claim of assessee. Accordingly this ground stands dismissed. 12. Before we undertake comparability analysis, it is sine qua non to understand functions carried out by assessee, assets employed and risks assumed in provision of software development service to its associated enterprise. A. Functions In TP study, at page 398 it has been submitted that assessee provides software development and support services to Applied Inc. In this regard assessee employed services of 3rd party service providers (eg: Tata consultancy services, Satyam Computer services, ASM Technologies Ltd etc.,) for sub contracting specific part of their work. Core activities of software development cycle are conducted in house by assessee and a part of non-core activities are subcontracted to third-party service provider. At page 403 summary of role played by assessee and the contractor's in development cycle has been summarised as under: It has been submitted that activities like developme....
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....ces for which segmental information is are available. Note 29 at page 1647 reveals that this company earns foreign currency from export of software services. On the contrary, Ld.CIT.DR submitted that, it is an accepted position that this company is providing ERP products and services. Further, it is also an admitted position that this company is operating in variance segments including software product however the segmental information available is only as income from software services. Ld.CIT DR referred to decision of this Tribunal in case of M/s.Metric stream Infotech (India) private limited vs DCIT in ITA (TP) A No. 1418 and 2735/B/2017 for assessment year 2013-14 wherein this comparable has been upheld for exclusion. We have perused submissions advanced by both sides in light of records placed before us. We also perused decision relied upon by Ld.CIT DR in case of M/s Metricstream Infotech (India) Pvt.Ltd (supra),. It is noted that this Tribunal excluded this comparable for the reason that nature of services are doubtful. Before us, Ld.AR has not been able to establish correct nature of business carried out by this company or provide with segmental information is i....
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....5 These grounds have been raised by assessee against inclusion of following comparables: • CG Vak Software Exports Ltd. • Mindtree Ltd. • Persistent Systems Ltd. • Larsen and Toubro Infotech Ltd. a) CG Vak Software Exports Ltd. This company has been included by Ld.TPO since revenue from software services is Rs. 8.55 crores as compared to the BPO segment being Rs. 14.43 Lacs. The Ld.AR submitted that, admittedly this company earns revenue from 2 segments being, software development services and BPO services. However Ld.TPO considered entire revenue at entity level. It has been submitted that, there is no segmental details available. Ld.AR submitted that, in assessee's own case for assessment year 2012-13 this comparable was excluded for being functionally different by Ld.TPO himself. On the contrary, Ld.CIT DR submitted that this comparable has got segmental details in respect of software development services as well as BPO services which is apparent from the annual reports placed at page 1173-1222 of paper book. Referring to page 1202, Ld.CIT DR submitted that Ld.TPO has considered software service segment for comparin....
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....independent testing, infrastructure management services, mobility, product engineering and SAP services. It is further been submitted that this company does not have segmental information on the basis of which revenue earned from different verticals could be identified. This company also owns huge intangibles and therefore deserves to be excluded. Ld.AR referred to page 1259, 268, 1273, 1291, 1297, 1299, 1334, 1335, 1337,and 1347 in support. On the contrary Ld. CIT DR placed reliance upon orders passed by authorities below. We have examined the annual reports of this company and it is observed that this company carries out research and development activities and has created large intangibles. Under such circumstances we do not find this company to be comparable with that of a captive service provider like assessee. We therefore direct the Ld. AO/TPO to exclude this comparable from the final list. c) Persistent Systems Ltd It has been submitted that this comparable has been included by Ld.TPO even though it was objected by assessee for functional dissimilarities. Ld.AR submitted that this company is engaged in both product and development of software development servi....
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....ons. Ld.AR submitted that this company earns revenue from software solutions and products without there being segmental details available. It has been submitted that Ld.TPO has accepted that this company deals and products but still has included in the list of comparables to be compared with a contract software service provider like assessee. This comparable also owns huge intangibles and incurs expenditure to maintain the brand name which has earned 8 supernormal profits during the year. Further it has been submitted that this comparable stood excluded by decisions of this Tribunal in assessee's own case for assessment year 2011-12 and 2012- 13(supra). On the contrary, Ld.CIT.DR submitted that in case of CGI Information Systems and Management Consultants Pvt.Ltd vs DCIT reported in (2019) 101 taxman.com 294, this Tribunal has set aside this comparable to the file of Ld.TPO for fresh decision. She submitted that in case of CGI Information Systems and Management Consultants Pvt Ltd (supra) this Tribunal relying upon the case of Advice America Software Development Centre (P) Ltd reported in (2018) 94 Taxmann.com 179 and observations made therein. She thus submitted that this compa....
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.... the computer and can function independently without being attached to a computer. He thus submitted that these machines do not therefore fall into the category of peripherals attached to the computer. He thus supported the orders passed by authorities below. 13.3. We have perused submissions advanced by both sides in light of records placed before us. Undoubtedly machines like racks, batteries stabilisers can function without a computer and is attachable to any other electrical appliances. Therefore these machines do not form part of computer peripherals. Insofar as the Xerox machine is concerned, it is an ascertained able at this stage whether these machines could be exclusively and independently used without being attached to a computer as such kinds of Xerox machines do exist. Assessee has also not been able to establish details of accessories that has been categorised to be forming part of computer peripherals. 13.4. Accordingly we set aside this issue back to Ld.AO/TPO for verifying the actual use and nature of Xerox machines and the accessories that has been considered as computer peripherals. In the event it is ascertained able that these accessories and Xerox mach....