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2020 (6) TMI 584
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....ocade Communications Switzerland SARL, Switzerland with the latter holding 99.99% of equity shares of the assessee. The assessee provided software research & development services and marketing & technical support services to its AEs. 4. For the year under consideration, the assessee, inter alia, provided contract SWD services to its AEs for a consideration of Rs. 161,91,46,172. It is not in dispute that the transaction of rendering SWD services by the assessee to its AE was an international transaction and therefore the price received by the assessee from its AE and income received from such transaction has to pass the Arm's Length Price [ALP] test as laid down in section 92 of the Act. 5. The assessee in support of its claim, that the price received from the AE was at arm's length, filed a TP analysis in which it adopted Transaction Net Margin Method [TNMM] as the Most Appropriate Method [MAM] for determining the ALP. The Profit Level Indicator [PLI] chosen for comparing the assessee's profit margin with that of the comparables was Operating Profit to Operating Cost [OP/OC]. The OP/OC of the assessee was as follows:- Operating Income Rs. 162,92,37,531/- Operating....
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....usion of CG-Vak Software and Exports Ltd. However the other contentions of the Appellant seeking the exclusion of incomparable companies and inclusion of comparable companies came to be rejected. (ii) Working capital and risk adjustments: The DRP upheld the action of the TPO in not granting any adjustment towards the differences in working capital ("WC Adjustment") and risk of the Appellant and the comparable companies. 10. On giving effect to the above directions issued by the DRP, the final list of comparables is as follows: Sl. No. Name of the Company 1 Infosys Ltd. 2 Larsen & Toubro Infotech Ltd. 3 Mindtree Ltd. 4 Persistent Systems Ltd. 5 R S Software (India) Ltd. 6 Thirdware Solutions Ltd. 7 CG-Vak Software and Exports Ltd. 11. The AO passed the impugned final assessment order in line with the directions of the DRP in which the TP adjustment was reworked. Aggrieved by the addition made in the final assessment order, the assessee is in appeal before the Tribunal. 12. Briefly, the grounds in the appeal which are being pressed are as follows:- (i) That the DRP erred in upholding the i....
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....infrastructure management services. Despite rendering these diverse services, the segmental details of the various services and products are not available. The company's business segments are divided into service cluster, industrial cluster and telecom business. In the absence of segmental data being made available as regards the diverse services, it is not possible to determine whether the company passes the filters applied by the TPO. Therefore, the company ought to be excluded. Further, the company is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles, intellectual property rights and business rights. Also, in addition to the above, the company owns proprietary software products which are developed in-house. Accordingly, the Appellant submits that L&T is a product company having significant intangibles and is thus not comparable to captive software development service providers such as the Appellant who does not own any significant or non-routine intangibles. Further, L&T enjoys significant brand value. As a result of this high brand value, the company enjoys a high bargaining power in the market. (c) Persisten....
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....ngly allowed. 16. As far as ground Nos. 7 & 8 are concerned, the assessee seeks inclusion of Akshay Software Technologies Ltd., Sasken Communication Technologies Ltd. Maveric Systems Ltd., Sakhya Infotech Ltd. and 8K Miles Software Ltd. Akshay Software Technologies Ltd. ("Akshay") 17. This company was selected by the assessee in its TP analysis but was rejected by the TPO for the reason that the company is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services, and that the company incurred expenditure to the tune of 85% on foreign branches, which suggested that the business model adopted by the company was different from that of the assessee. The exclusion of this company came to be upheld by the DRP on the latter basis. 18. Before the Tribunal, the ld. AR submitted that firstly, perusal of the functions of the company listed in its annual report shows that the company is functionally similar to the assessee. The website of the company states that the company is engaged in rendering IT services, which are in the nature of SWD and caters to the needs of corporate bodies, banks and finan....
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....nsing, SWD and royalty; and (iii) the company offers R&D consultancy, wireless and software products. 23. In this regard, it was submitted by the ld. AR that the company is functionally similar to the Appellant as the services rendered by the company predominantly are in the nature of SWD services, with 99.12% of its revenue for the year being generated from rendering the said services. The income from software products constitutes a meagre 0.88% of total revenue, which would not have any impact on the profitability of the company's SWD services segment. Detailed submissions in this regard are placed at pages 169 and 429 of the paperbook. Further, the services rendered by the company predominantly fall within the ambit of SWD services as per the Safe Harbour rules prescribed by the CBDT and therefore the company is comparable to the assessee. Further, it was submitted that the DRP erred in taking into account only the revenues earned from services rendered to customers in North America, Europe and Asia Pacific region while determining whether the company passes the export revenue filter applied by the TPO. It was submitted that if the entire foreign exchange earned by the com....
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....ith R&D expenditure of less than 3% alone were considered. 30. In this regard it was submitted that the actions of the lower authorities are erroneous and wholly inconsistent. It was submitted that while the TPO rejected the application of R&D expenses > 3% of total turnover filter, the DRP upheld the exclusion of the company on the basis that it incurred R&D expenses in excess of 3% of revenue. This action of the DRP is wholly baseless and arbitrary and on that ground, the company ought to be included in the final list of comparables. It was submitted that the company is functionally comparable and passes all filters applied by the TPO, which is not disputed by the lower authorities. Therefore this company ought to be included in the final list of comparables. Relevant submissions in this regard are placed at pages 171 and 474 of the paperbook. 31. Reliance was placed on the decision of this Tribunal in the case of EMC Software and Services India Pvt. Ltd. v. JCIT (supra) wherein in the case of an assessee placed similar to the assessee, the company's comparability was remanded to the TPO. 32. The ld. DR relied on the order of the DRP. 33. In the light of the submissio....
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....f the view that the comparability of the company should be considered afresh by the TPO both on the export revenue filter and the filters applied by the DRP, because admittedly the assessee was not confronted by the DRP on the new filter it applied nor did it give a finding one way or the other on the export turnover filter. 40. In ground no.4, the assessee has projected its grievance regarding non-grant of working capital adjustment (WCA) and risk adjustment. The assessee submits that that Rule 10B(3) of the Income-tax Rules, 1962 ("the Rules"), itself categorically provides that an adjustment ought to be provided for any differences in the economic factors between the tested party and the comparables. A working capital adjustment is one such adjustment which is to be applied in order to adjust for the differences between the working capital positions of the tested party and of the comparable. 41. Reliance was placed by the assessee on the decision of this Tribunal in the cases of Bearing Point Business Consulting (P.) Ltd. vs. DCIT [(2013) 33 taxmann.com 92]. Further in the assessee's own case for the AY 2010-11, this Tribunal held that working capital adjustment ought to b....
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....om 342 (Pune -Trib.), wherein the Tribunal granted an adjustment to be granted for differences in risk assumed by the tested party and the comparable entities. 46. We are of the view that the question of allowing risk adjustment should be considered by the TPO afresh in the light of the submissions and after examining the computation of risk adjustment and affording opportunity of being heard to the assessee. 47. In Ground No. 10 the assessee pointed out to the mistakes in computation of PLI. It was submitted that the TPO has considered provision for doubtful debts and provision for doubtful advances are nonoperating in nature and the action was upheld by the DRP. In this regard it was submitted that provision for doubtful debts is a provision which is to be made as a part of the operating activities of business governed by the principles of prudence, and therefore it is not correct to contend that the same is non-operating in nature. Reliance in this regard is placed on the decision of the Delhi Bench of the Tribunal in the case of Rolls- Royce India (P.) Ltd. v. DCIT (reported in [2016] 69 taxmann.com 209 (Delhi - Trib.). Therefore it was submitted that the aforesaid ite....
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....der Section 28(iv) of the Act. Reliance in this regard is placed on the following decisions: i. Mahindra and Mahindra Ltd. v. CIT (reported in 261 ITR 501) ii. Logitronics Pvt. Ltd. v. CIT (Order passed by the Hon'ble Delhi High Court on ITA No. 1623/2010) and iii. CIT v. Jubilant Securities Ltd. (Order passed by the Hon'ble Delhi High Court on ITA No. 503/2010) 55. Further, it was submitted that a benefit/perquisite can be brought to tax under Section 28(iv) of the Act only if the same is in the nature of income. In the present case, the assets received by the assessee cannot be treated as income inasmuch as the goods are capital in nature and therefore cannot be treated as a trading receipt. 56. It was submitted that out of the total amount of Rs. 15,07,90,003/- brought to tax under Section 28(iv) by the AO, the DRP directed that an amount of Rs. 1,65,86,025/- be brought to tax under Section 69 of the Act. It was submitted that the AO grossly erred in bring the value of certain assets received free of cost by the assessee to tax under Section 69 of the Act. It was submitted that the said section does not apply at the very threshold as the requi....
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....essee, the DRP found that the invoices submitted in respect of the assets of the value of Rs. 1,65,86,025 did not show that the assets came to be received free of cost or loan basis by the assessee from its AE. In the above circumstances, the DRP treated the assets worth Rs. 13,42,03,978 [15,07,90,003 (-) 1,65,86,025] as value of benefit/perquisite received by the assessee in the course of business and taxed it u/s. 28(iv) of the Act. A sum of Rs. 1,68,86,025 was taxed as income from other sources. 60. As rightly contended by the assessee, the provisions of section 69 are not attracted because there is nothing brought on record to show that the assessee was the owner of these assets. From the fact that invoices were in the name of assessee, it cannot be said that assessee was the owner of the assets, especially in the light of the affirmation by Brocade Communication LLC that they are given all the assets free of cost to the assessee. Therefore, the addition of Rs. 1,65,86,025 u/s. 69 of the Act cannot be sustained. 61. The entire value of assets totalling Rs. 15,07,90,003 has to be regarded as an addition made u/s. 28(1)(iv) of the Act, as was done by the AO in the order of ....