TaxTMI 
TaxTMI 
2019 (6) TMI 1489
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....mmissioner of Income-tax (Transfer Pricing)- 3(2) ('TPO'), without applying his mind and without recording his satisfaction, thereby making the entire process of referring the matter to the TPO as invalid; 1.2 The learned CIT(A) erred in confirming the action of AO of not stating reasons to show that any of the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied before making an adjustment to the total income of the Appellant; 1.3 The learned CIT(A) erred in confirming the action of AO of not demonstrating the motive of the Appellant to shift profits outside of India by manipulating the prices charged in its international transactions, either at the stage of invoking or initiating the assessment or at the stage of framing the assessment; 2. Adjustment of INR 52,13,311 in respect of international transaction of provision of Business Support Services ('BSS') to AEs 2.1 The learned CIT(A) erred in determining the ALP in respect of BSS provided to AEs at INR 9,01,18,079 instead of INR 8,49,04,768 determined by the Appellant, thereby confirming the addition of INR 52,13,311 made by the AO 2.2....
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....d programmes, internet and intranet application services/facilities, Database and system networking, project management, training on functional and technical aspects and end user training. The assessee had entered into various international transactions with its AE for providing Information technology services and business support services. In respect of IT services, the assessee has added a markup of 10% on total cost and compared price charged to AE by adopting Transactional Net Margin (TNM) method as the most appropriate method to benchmark the aforesaid transaction. Further, the assessee has used ratio of operating margin to operate cost as the profit level indicator for testing the Arm's Length Price. The assessee has selected six comparables with mean a margin of 5.19% and compared with margin charged to its AEs and said that its transaction with AE is at Arm's Length Price. In respect of providing business support services, the nature of services rendered by the assessee includes providing support in form of evaluation and recommendation for finalization of contracts for procurement of goods and services for execution of the project and providing back office support ....
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....ain comparables and selected five set of comparables with average margin of 25.15%. Further, the TPO after considering the value of international transactions arrived at an adjustment of Rs. 1,05,26,570/- in respect of ITES services. The relevant findings of TPO are as under:- "4. Information Technology Enabled Support (ITES) Services It was submitted that during the financial year (FY) 2010-11, two Indian companies namely Reliance Info Solutions Private Limited ('RISPL') and Reliance Global Management Service Limited ('RGMSL') got amalgamated with the assessee. as per the Scheme of Amalgamation, sanctioned by the Hon'ble High Court of Bombay, vide its order, dated 25th March 2011, the appointed date of the scheme being April 1, 2010. During FY 2010-11, RISPL (amalgamated with the assessee) had provided Information Technology Enabled Support CITES') services to the aforesaid AF's. The scope of work for ITKS Services rendered by the assessee to AE's included the following ♦ IT infrastructure implementation and support services, ♦ Internet data center services, ♦ Managing software,....
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....;s based on the PLI were worked out as under: Details of Operating Margins earned by Comparables Companies - ITES Support services Sr. Profit level Indicator ['PLI - PBIT/Operating cost including dep)] (Amount in Cr Rs) Company Name Year Service Income Operating Cost including Depreciation Operating Margin PBIT Op margin as % of Op Cost 1 A B C D E F G = F/EMWT 1 Allsec Technologies Ltd March 11 0.142 0.149 -0.007 (4.69) 2 Caliber Point Business Solutions Ltd Dec 2010 79.244 72.019 7.225 10.03 3 Cameo Corporate Services Ltd March 11 83.41 74.86 8.55 11.43 4 Godrej Infotech Limited March 11 March 11 43.12 42.67 0.45 1.04 5 Jindal Intercom Limited 39.04 34.52 4.51 13.07 6 Sparsh BPO Services Ltd March 11 226.80 226.22 0.58 0.26 Average 5.19 Accordingly, it was submitted that with respect to ITES services provided to AE's, the arithmetic mean of operating margins of c....
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....ready considered ax a comparable in BS services. On perusal of the scope of work for ITES services provided by the assessee to AE's it can 'be observed that the assessee is engaged in the business of providing IT Infrastructure implementation and support services as 'well as managing software, computer systems and programs etc. Although, services rendered by M/s Cameo Corporate Services Ltd w.r.t. registry and securities transfer services, document management solutions, e-publishing etc. are not identical to the services rendered by the assessee to its AE, the same can be considered as comparable on the ground that these are more in (he nature of support services and hence this company was considered as a comparable. The fact that this is already considered as a comparable for BS services cannot be a ground for rejecting the same from BS services. In light of the above, we wish to submit that this company is a comparable company and hence (lie same should be accepted in the final set of comparable." Godrej Infotech Limited - The assessee contended (hat " Godrej Infotech Limited are services and consulting company. Its products include....
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....ch includes web content management and merchandising execution, web analytics, social media moderation and analytics, search engine analytics and support, CRM platform support etc. Its client include companies in financial services, broadband, cable & telecom, e-commerce and retail, high tech, industrial manufacturing & distribution, software, media & entertainment and travel companies. " -Infosys BPO Ltd. The assessee has contended that this company should be rejected on the ground of high turnover. The contentions of the assessee have been examined. However the same are not acceptable for the reasons stated below: (i) Allsec Technologies Ltd; From the perusal of the annual report it is seen that the company has incurred losses in FYs. 2007-08, 2008-09 and 2009-10 of Rs. 11.06 crore, Rs. 7.02 crore and Rs. 6.81 crore. Though it might be functionally comparable but a continuous toss for the past three years indicates aberration in the operations of this company. Loss cannot be the steady state of any business. Therefore, it cannot be used as a comparable company to benchmark the assessee's transaction. Thus, this company is rejected. ....
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....so in Agilent Technologies case in view of this, the assessee's contention is rejected (vi) Infosys BPO The assessee has contended that this company has high turnover on the basis on which it should be treated as functionally different and thus, not comparable. The assessee's hypothesis that there is a direct co-relation between turnover and profit margins of the company is not acceptable. The Transfer pricing rules or the OECD guidelines do not prescribe any specific range of turnover for comparability corresponding to size and scale of operations. Once functional similarity is accepted, companies can be compared irrespective of the turnover, size or scope of operation. Particularly in the' service industry where not much of infrastructure is needed to set up business, The fixed costs in the software/ITES industry are insignificant compared to the manufacturing industry. The major costs in the software and ITES industry which includes the assessee are variable costs such as salary, travelling expenses, communication expenses etc. This fact can be verified from the assessee's own case. Margins in any industry vary with change in t....
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....hich provides the detail of Fixed Asset) it can be observed that the addition to Fixed assets during FY 2010-11 is only 17% of the total gross block of fixed assets as on 1st April 2010 (i.e. Rs. 49,5,42,473/ Rs. 290,368,943* 100). Hence, although during FY 2010-11, the company increased its installed capacity by 45%, this year cannot be considered as an exception year. The explanation provided by the assessee has been considered. Since addition to fixed asset made by M/s. Jindal Intellicom Limited during FY 2010-11 is only 17%, the same is not considered as an exception year and hence the same is accepted as a comparable. Accordingly, in light of the aforesaid discussions, the margins of comparable companies for benchmarking ITES services provided by the assessee to its AE are arrived as under: Details of Operating Margins earned by Comparable Companies - ITES Support services Pro Fit level Indicator ['PLI = PBI'/Operating cost including dep}] (Amount in cr Rs) I Sr Company Name Year Service a Income Operati....
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....in form of evaluation and recommendation for finalization of contracts for procurement of goods and services for execution of the project and provide ♦ Providing back office support in matters relating to accounting, taxation, insurance, HR & Administration An arm's length markup of 7% was added to the cost of Rs. 7,93,50,250 [which included all the personnel cost and all overhead expenses (including depreciation)] to determine the arm's length price of the international transaction. Accordingly, RGMSL (amalgamated with the assessee) had raised the following invoices on respective AE's. Name of the AE Invoice No Date Amount in USD Amount in Rs M/s. GKL 72 31.07.2010 3,95,000 4,30,51.840 192 31.12.2010 5,53.000 M/s. GOTL 70 31.07.2010 1,13,500 1,23,70,592 190 31.12.2010 1,58,900 M/s. GTL 73 31.07.2010 1,13,500 1 23 70,592 193 31.12-2010 1,58,900 M/s. GUL 71 31.07.2010 1,48,000 1.61.30.816 191 31.12.2010 2,07,200 M/s. GRL 74 31.07.2010 9,000 9,80....
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....2.22% on its operating costs including depreciation (i.e. Rs. 10.96 cr/Rs. 494.32 cr). In light of the aforesaid, it was submitted that the aforesaid margin analysis (i.e of both internal and external operating margins) confirms that the international transaction entered by the assessee w.r.t to provision BS services to its AE's was at arm's length price and accordingly, the TNM Method' has been correctly adopted by the assessee for determining the arm's length price w.r.t. the aforesaid transaction. As regards, BS Services, the assessee was asked to show cause as to why the following companies should not be rejected for the reasons specified therein:- Sr in the final set of Name of the comparable company Reason for rejection from the final set of comparable 3 GMR Corporate Affairs Pvt. Ltd. Substantial related party transactions-more than 25% 4 TVS-E Servicetec Ltd. Functionally different Further, the assessee was requested to show cause as to why the following companies should not be included in the final set of BS service comparable. Sr. Name of the comparable company 1 Apitco 2 ICRA Manageme....
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....50 19.92 5 India Cements Capital Ltd March 11 4,873.80 4,110.60 763.20 18.57 6 Techprocess Solutions Ltd March 11 57.53 56.65 0.88 1,55 Average 14.05 Accordingly, the arm's length price for BS services rendered by the assessee to its AEs is determined as under:- a. Value of international transaction is Rs. 8,49,04,768/- b. ALP of the International transaction (at 14.05% markup on cost of Rs. 7,93,50,250) is Rs. 9,04,98,960/- c. 105% of the International transaction value. Rs. 8,91,50,006/- d. 95% of the International transaction value. Rs,8,06,59,529/ e. Amount of adjustment with respect to BS services is Rs. 59,94,1927- (Rs. 9,04,98,960 - Rs. 8,49,04,768) As the ALP falls outside the limit of +/- 5% of the transaction value, an amount of Rs. 59,94,192/- is adjusted to the international transaction. Conclusion: In view of the above discussions, the total amount of adjustments in determining ALP of international transactions are proposed and summarised as under: Sr Transaction Adjustment (in....
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....urther stated that the said plant has been used by the assessee for more than 5 years and as per various clauses of lease agreement, the assessee has only leased the asset without any transfer of right. Therefore, it remains the owner of the asset and accordingly it has claimed depreciation on the said asset as per provisions of section 32 of the Act. The assessee further stated that as per the requirement of Companies Act, 1956), it is required to follow all accounting standard issued by the ICAI for preparation of financial statements. Accordingly, as per the accounting standard -19 issued by the ICAI, the assessee was obliged to account lease income as finance lease in its books of account. The assessee further stated that in the books of accounts, it is shown only income by way of lease finance charges of Rs. 19,50,32,448/-, but since the actual lease rent received by it including principal is Rs. 36,40,34,876/-, it has offered the same as income. With regard to depreciation, the assessee submitted that as per Provisions of the I.T. Act, the assessee has claimed depreciation in respect of leased assets, because the ownership of the asset remains with the assessee even though th....
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....t to the lessee for five years and as per clause of lease agreement, the ownership of asset rest to the assessee. The assessee further submitted that in order to claim deprecation as per IT Act, it is precondition that the asset should be owned by the assessee. Since the assessee has owned the asset, it is rightly claimed depreciation on asset leased out to M/s Reliance M/s Reliance Industries Ltd. The assessee has also relied upon the decision of the Hon'ble Supreme Court in the case of I.C.D.S Ltd. v. CIT [2013] 29 taxmann.com 129/212 Taxman 550/350 ITR 527. 11. The CIT(A), after considering relevant submission of the assessee and also relied upon various judicial precedence, including the decision of the Hon'ble Supreme Court in the case of I.C.D.S. Ltd. (supra) held that as could be seen from the facts brought out by the AO during the assessment proceedings, it is very clear that the facts of the assessee's case are similar to the facts of the I.C.D.S. Ltd. case (supra), therefore, depreciation is allowable in the hands of the owner of the property and further it is not material, the location of the asset whether it is in the possession of the lessee or lesser, b....
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....ount of depreciation on assets leased (finance lease) without appreciating the fact that in finance lease, all the risk and rewards, incidental to ownership of an asset is transferred to the lessee and the lessor cannot claim depreciation on the leased plant and machinery. The ld. DR further submitted that the AO has brought out clear facts to the effect in light of AS-19 issued by the ICAI, as per which, in finance lease the lessee can claim depreciation on leased asset because all the risk and rewards incidental to ownership of an asset shall transferred to the lessee. The Ld. DR further submitted that as per Accounting Standard-19, the lease term is clearly would be equal to the normal economic life of the asset, even if title is not transferred. It is worth to note that AS-19 prescribes that the depreciable amount of a leased asset is allocated to each accounting period during the period of expected use on a systematic basis consistent with the depreciation policy the lessee adopts for depreciable assets that are owned. Thus, it is clear that AS-19 allows the lessee to claim depreciation on the asset and not the lessor. Therefore, the assessee's claim for depreciation on th....
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....s. There is no dispute with regard to ownership because even after lease, the ownership of the asset is remained with the assessee. The assessee has continued to claim depreciation. Therefore merely for the reason that AS-19 prescribes depreciation to be claimed by lessee in case of finance lease, the claim of depreciation cannot be disallowed in the hands of the assessee, when material clearly indicate that lessee did not claim depreciation on leased assets and assessee is also continued to be the ownership of the asset. In this regard, he relied upon various judicial precedence including the decision of the Hon'ble Supreme Court in the case of ICDS Ltd. The assessee has also relied upon following decisions:- (1) Minda Corpn. Ltd. v. Dy. CIT [2016] 69 taxmann.com 317 (Delhi - Trib.) (2) Bharti Hexacom Ltd. v. Asstt. CIT [2016] 68 taxmann.com 357 (Delhi - Trib.) (3) Royal Bank of Scotland N.V. v. Dy. CIT, International Taxation [2017] 88 taxmann.com 330 (Kol. - Trib.) (4) Tata Consultancy Services Ltd. v. Asstt. CIT [2017] 88 taxmann.com 399 (Mum. - Trib.) (5) Industrial Finance Corpn. of India's case (supra) (6) SBI Hom....
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....eatment of the assessee in its books of account as also supports the case of the Revenue that the assessee has reduced entire value of plant and machinery from the computation of depreciation as per Companies Act. Therefore, it is abundantly clear that no depreciation relating to the plant and machinery given on lease has been debited in the books of account. However, the assessee has claimed depreciation in the statement of total income as per I.T. Act and also offered total lease rental received including lease rental on account of principal portion to taxation to argue that it is entitled for depreciation. The assessee has filed a confirmation from the lessee and stated that lessee did not claim depreciation on plant and machinery, because the ownership of the asset is not transferred to the lessee during subsistence of lease period. Accordingly, the assessee argued that particular mode of recording the transactions in books is of no consequence, but what is relevant is nature of the transactions which to be considered to arrive at proper conclusion. The assessee has also referred Circular No. 2 of 2001 of CBDT, where it was mentioned that the method prescribed in AS-19 per se w....
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....When the department has accepted the income offered for taxation, it cannot be turnaround to deny depreciation only for the reason that in finance lease, the ownership of the asset was transferred to the lessee. Although, AS-19 issued by ICAI is required to be followed mandatorily for preparation of financial statements, but when it comes to taxation of income, what is relevant is the provision of the Act which deals with taxability of income, but not guideline issued by the ICAI. This fact has been further reiterated by CBDT vide its Circular No.2, dated 09/02/2001, where it was clarified that AS-19 will not have any implication on allowance of depreciation on assets under the provisions of the Income Tax Act. Further, the assessee has also filed a confirmation from the lessee, where it was stated that lessee did not claim depreciation on leased asset. From the above facts, it is very clear that the assessee is continued to be owner of the asset even after the lease. Further, the entries in books of account is not determinative for deciding the nature of income which is assessable under the Act, what is relevant is statute as per which ownership of an asset is must for claiming de....
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....terms also included one having a possessory right to land or the person occupying or cultivating it. The term "owner" is used to indicate a person in whom one or more interests are vested his own benefit. The person in whom the interests are vested has 'title' to the interests whether he holds them for his own benefit or the benefit of another. Thus the term "title" unlike "owner".." It defines the term 'ownership' as - "Collection of right to use and enjoy property, including right to transmit it to others.... The right of one or more persons to possess or use a thing to the exclusion of others. The right by which a thing belongs to someone in particular, to the exclusion of all other persons. The exclusive right of possession, enjoyment or disposal; involving as an essential attribute the right to control, handle, and dispose." The same dictionary defines the term "own" as 'To have a good Legal title These definitions essentially make ownership a function of legal right or title against the rest of the world. However, as seen above, it is "nomen generalissimum, and its meaning is to be gathered from the connection in whic....
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.... such arrears or in endeavouring to trace the whereabouts of the equipments or in obtaining or endeavouring to obtain possession thereof whether by action, suit or otherwise, shall be recoverable from the lessee in addition to and without prejudice to the lessors right for breach of this lease. 19. Expiration of Lease: Upon the expiration of this Lease, the Lessee shall deliver to the Lessor the assets at such place as the Lessor may specify in good repair, condition and working order. As soon as the return of the asset the Lessor shall refund the amount of security deposit. If the lessee fails to deliver the equipment to the Lessor in accordance with any direction given by the Lessor, the Lessee shall be deemed to be the tenant of the assets at the same rental and upon the same terms herein expressed and such tenancy may be terminated by the Lessor immediately upon default by the lessee hereunder or upon 7 days notice previously given.." 23. Revenue's objection to the claim of the assessee is founded on the lease agreement. It argued that at the end of the lease period, the ownership of the vehicle is transferred to the lessee at a nominal value not ....
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....iewed from the angle of the author of 'Lease Financing and Hire Purchase', the views of whom were discussed in pages 16 and 17 of this order, the transactions involved, in the appellant business are nothing but lease transactions. 23. As far as the factual portion is concerned now we could come to a conclusion that leasing of vehicles is nothing but hiring of vehicles. These two aspects are one and the same. However, we shall discuss the case law cited by both the parties on the point. " 27. Finally, learned senior counsel appearing on behalf of the assessee also pointed out a large number of cases, accepted and unchallenged by the Revenue, wherein the lessor has been held as the owner of an asset in a lease agreement. CIT v. A.M. Constructions [1999] 238 ITR 775 (AP); CIT v. Bansal Credits Ltd. [2003] 259 ITR 69/126 Taxman 149 (Delhi); CIT v. M.G.F. (India) Ltd. [2006] 285 ITR 142/[2007] 159 Taxman 335 (Delhi); CIT v. Annamalai Finance Ltd. [2005] 275 ITR 451/146 Taxman 627 (Mad.). In each of these cases, the leasing company was held to be the owner of the asset, and accordingly held entitled to claim depreciation and also at the higher rate applicable on....
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....er provisions of section 32(1)(ii) of the Act. The ld CIT(A) after considering relevant facts has rightly deleted additions made by the AO towards disallowance of depreciation, hence, we are inclined to uphold the findings of the ld CIT(A) and reject the ground taken by the Revenue. 22. The next issue that came up for our consideration from ground No.2 of Revenue's appeal is inclusion of Allsec Technologies Ltd., as comparable for determination of arm's length price of international transactions with Associated Enterprises. 23. The ld DR submitted that the ld CIT(A) was erred in including Allsec Technology Ltd. as comparable to the assessee without appreciating the fact that the company is incurring loss for last three years and also it is functionally different from the assessee's profile. The ld DR further submitted that various judicial pronouncement have already held that consistence loss company cannot be treated as valid comparable. 24. The ld. AR for the assessee submitted that Allsec Technology Ltd. is functionally comparable to the profile of the assessee and having once accepted the fact that it is functionally similar to the profile of the assessee, ....
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....rable. This legal proposition is further supported by the decision of Mumbai Bench of the Tribunal in the case of Maersk Global Service Centres (India) (P.) Ltd. (supra), where ITAT has held that losses cannot be a sole ground for rejection of comparables, when company is functionally comparable to the assessee. The ld. CIT(A), after considering relevant facts has rightly directed the TPO/AO to include Allsec Technology Ltd. as comparable and hence, we do not find any infirmity in the findings of the ld. CIT(A), accordingly, reject ground taken by the Revenue. 26. The next issue taken by the Revenue by way of ground No.3 is exclusion of Eclerx Services Ltd. as comparable for the purpose of determination of Arm's Length Price of international transaction with AE. 27. The ld. DR submitted that the ld. CIT(A) excluded Eclerx Services Ltd. Without appreciating the fact that the company is comparable to the functions carried out by the assessee and this fact has been brought out by the TPO in its order as per which functions carried out by the assessee are similar to the functions carried out by the Eclerx Services Ltd. The ld. CIT(A) without appreciating the fact, simply excl....
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....engaged in providing captive services to its AE in the area of ITeS service. The Id. CIT(A), after considering relevant facts has rightly rejected Eclerx Services Ltd. from the list of comparables and we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the Revenue. 30. The next issue that came up for our consideration from assessee's appeal is transfer pricing adjustment of Rs. 52,13,311/- in respect of international transaction of provision of business support services to AEs. 31. The assessee has challenged exclusion of TVS-E Services Ltd. from final set of comparables for benchmarking margin earned from provision of business support services to its AE on the ground of being functionally different. The assessee has also challenged the order of the ld. CIT(A) in accepting Atico Ltd. and ICRA Management Consulting Services Ltd. as comparables in benchmarking the margin earned from business support services to its AE TVS-E Services Ltd. 32. The ld. AR for the assessee submitted that TVS-E Servicetec Ltd. is functionally comparable to the assessee, because it is providing warranty management services for leading IT brands, break fix ser....
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....r General of India u/s 619(2) of the Companies Act, 1956. Further, this company has been rejected as comparable on account of functional dissimilarity by various judicial bodies including ITAT of Delhi in the case of Rolls-Royee India (P.) Ltd. v. Dy. CIT [2016] 69 taxmann.com 209 37. The ld. DR, on the other hand, strongly supported the order of the ld. CIT(A) and submitted that Aptico Ltd. is comparable to the activities of the assessee because some of the activities carried out by the Aptico Ltd. are similar to assessee's functions. 38. We have heard both parties, perused the material available on record and gone through orders of the authorities below. On perusal of annual report of Aptico Ltd., we find that the company is engaged in providing technical consultancy relating to asset reconstruction companies, management services, micro enterprises development, skill development etc. It is also engaged in the activity of skill development, tourism research studies, micro enterprise development, cluster development energy related services, etc. This is a government company and the statutory auditor of the company is appointed by the CAG. Its financial are mainly dependen....