TaxTMI 
TaxTMI 
2020 (10) TMI 24
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.... u/s 143 (3) read with Section 144C of The Income Tax Act, 1961[ The Act] dated 5/12/2016 passed by The Additional Commissioner Of Income Tax, Special Range - 8, New Delhi (The Learned Assessing Officer/ AO ) wherein the returned income of Rs. 1,132,764,007 370 filed by the assessee on 29/11/2012 is assessed at Rs. 1,515,053,700/-. The assessee has raised following grounds of appeal.- "1. That the assessing officer erred on facts and in law in completing assessment under section 144C read with section 143(3) of the Income-tax Act ("the Act") at an income of Rs. 151,50,53,700 as against the returned income of Rs. 113,27,64,370 under normal provisions of the Act. Transfer Pricing issue: 2. That the assessing officer/DRP erred on facts and in law in making an adjustment of Rs. 11,70,02,000 to the arm's length price of the 'international transaction' of provision of IT enabled services on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer ('TPO'). 2.1 That the DRP/TPO erred on facts and in law in not appreciating that the appellant being a routine back office support service provider cannot be compared with companies engaged in provisio....
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.... basis. Corporate Tax Issues: Disallowance of Management Services Fees 3. That on the facts and in the circumstances of the case and in law, the DRP/ assessing officer erred in disallowing under section 40(a)(i) of the Act, expenditure of Rs. 20,03,73,067 incurred on account of management services fees, allegedly on the ground that the appellant failed to deduct tax at source therefrom under section 195 of the Act. 3.1 That the DRP/assessing officer erred on facts and in law in holding payment made to Groupe Steria SCA ('Steria France') towards management services fees to be in nature of fees for Technical services ('FTS') in terms of Article 13 of India-France Double Tax Avoidance Agreement ('the DTAA'). 3.2 That the DRP/ assessing officer erred on facts and in law in erroneously relying upon the order of the Authority of the Advance Ruling ('AAR') without appreciating that the findings of AAR are perverse in light of the favorable order passed by the jurisdictional Delhi High Court in appellant's own case, thereby resulting in gross violation of the principles of natural justice. 3.3 Without prejudice, the DRP/assessing officer erred on facts and in law in not appreci....
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....ssing officer erred, while making the purported adjustment from "the export turnover", following the assessment order for preceding assessment years, without appreciating that the said issue has already been decided by the ITAT in favour of the appellant in assessment year(s) 2003-04 to 2009-10. 5. That the DRP / assessing officer erred on facts and in law in not allowing deduction under section 10AA of the Act in respect of expenses disallowed under section 40(a) of the Act to the extent of Rs. 10,01,22,742, computed by apportioning the aggregate disallowance of Rs. 20,03,73,067 to Noida-4 unit on the basis of turnover. 5.1 That the DRP/ assessing officer erred on facts and in law in not appreciating that disallowance of deduction under section 10AA of the Act cannot be made with respect to increased profits on account of statutory disallowances. Disallowance of foreign exchange loss 6. That the DRP/ assessing officer erred on facts and in law in disallowing mark to market ('MTM') losses of Rs. 5,58,54,852 on account of unrealized foreign exchange forward contracts entered into for hedging the export proceeds against currency fluctuation holding the same to be 'contingent ....
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....he decision of the honourable Supreme Court in case of National thermal Power Co Ltd versus Commissioner of income tax 229 ITR 383 and also the decision of June Corporation of India versus CIT 187 ITR 688. Along with the additional ground, the assessee submitted that they chart wherein it is stated that assessee has filed the return of income on 29/11/2012 and the draft assessment order thereon was passed on 30 March 2016. The DRP issued its direction on 22 November 2016 and the due date for passing final assessment order u/s 153 (1) read with Section 153 (4) of the act was 31st of March 2016 whereas the final assessment order has been passed on 5 December 2016. Therefore it was submitted that this is a purely legal issue, which should be admitted. 6. The learned authorised representative vehemently supported the application for admission of the additional ground stating the same facts as were stated in the application for admission of the above ground. 7. The learned read departmental representative vehemently opposed the application for admission of the additional ground submitting that that ground has not been raised before the any of the lower authorities and should not be ad....
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....substance, in ground number 2.3 of the appeal the assessee objected to the comparables included by the learned that transfer pricing officer namely (1) E Clerx services Ltd, (2) Infosys BPO Ltd, (3) TCS E serve Ltd, (4) informed technologies Ltd and (5). B N R Udyog limited (segment). The ground number 2.1 - 2.8 are various sub grounds of the transfer pricing adjustment. However they revolve around the above five comparables only. 13. The assessee is engaged in the business of software development, maintenance and IT enabled services. It filed its return of income on 29/11/2012 declaring income of Rs. 1,132,764,370/-. The brief profile of the assessee shows that it is a subsidiary of a UK company. It provides system integration, enterprise solutions, software development services to the clients of its associated enterprise and two other independent customer is in UK, US and other countries in Europe as well as in India. It provides information technology enabled services in the nature of back-office process outsourcing and inbounds and outbound voice based services (BPO). It entered into following 11 international transactions with its associated enterprises and were benchma....
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....s. Accordingly order u/s 92CA (3) of the income tax act 1961 was passed on 29 January 2016 by The Joint Commissioner Of Income Tax, Transfer Pricing Officer 3 (1), New Delhi[ The ld TPO] 15. The learned assessing officer passed draft assessment order on 30 March 2016 determining total income of the assessee at Rs. 114,46,78,666/- against the returned income by the assessee of Rs. 113,27,64,370/-. Over and above, the above stated transfer pricing adjustment of Rs. 117,002,000 to the ITeS segment of the assessee, the learned assessing officer made a. disallowance u/s 40 (a) (i) of Rs. 200,373,067/- for non-deduction of tax on remuneration for management services to group entity, b. disallowance of deduction u/s 10 AA of the act of Rs. 9,059,414/- and c. addition on account of loss on foreign exchange fluctuation of Rs. 245,904,852/-. 16. The assessee preferred its objections before The Dispute Resolution Panel - 2, New Delhi[ The Ld DRP] . It passed its direction on 22/11/2016 wherein it rejected the objections of the assessee on comparability analysis with respect to certain comparables, rejected the objection with respect to the disallowance of expenses of Rs. 200,373,067, ....
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....para 21 onwards), the Hon'ble Delhi High Court rejected companies having high brand value as comparable to captive service provider. 19. It is submitted that (2) TCS E serve Ltd. enjoys benefits associated with the brand name 'TATA' as has been held by the Hon'ble Delhi High Court in the case of PCIT vs B.C. Management Services (P.) Ltd 403 ITR 45 (Delhi) (Page 204-205 of Case Law Paper book - Transfer Pricing; para 13 onwards), wherein the Hon'ble High Court upheld the exclusion of this company on account of the brand value associated with 'TATA' brand. The Hon'ble Delhi Bench of the Tribunal in the appellant's own case for assessment year 2015-16 (ITA No. 6687/Del/2019) rejected Infosys BPO ltd as comparable on the basis that it enjoys significant brand presence and brand value plays a significant role in its ability to generate profit. Accordingly, it is submitted that since TCS E serve Ltd. too, enjoys significant benefits associated with brand 'TATA', the company is not functionally comparable to the appellant, a captive service provider. Also, the Hon'ble Delhi High Court in the case of PCIT vs Evalueserve SEZ (Gurgaon) Pvt. Ltd (ITA 241/2018) upheld the rejection of this c....
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....lied upon by the learned authorised representative it was submitted that it cannot be held that if comparable X is found to be functionally different then assessee Y, then it should be excluded in case of assessee A. He further submitted that judicial precedent for the comparability analysis couldn't be applied in such a manner. 23. We have carefully considered the rival contention and perused the orders of the lower authorities. There is no dispute on the functional profile of the assessee. The only dispute is with respect to selection of only two comparable companies namely Infosys BPO Ltd and TCS E serve Ltd. 24. In assessee's own case for assessment year 2015 - 16 this comparable company was tested by the coordinate bench in ITA number 6687/del/2019 wherein it has held as Under:- "5.2 With respect to the Transfer Pricing Adjustment in respect of IT Enabled Segment, although the assessee has challenged selection of comparables as well as rejection of comparables in the grounds of appeal, the Ld. Authorized Representative has argued at length only against the inclusion of Infosys BPO Ltd. in the final set of Steria (India) Ltd. Vs. ACIT comparables on the grounds that this co....
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....nes, the Hyderabad Bench of ITAT in the case of Hyundai Motors India Engineering. Vs. ITO in ITA NO.1850/Hyd/2012 directed the exclusion of Infosys BPO Ltd. from the final set of comparables by holding that, "....'presence of a brand commands premium price and Steria (India) Ltd. Vs. ACIT the customers would be willing to pay, for the services/produced of the company. Infosys BPO is a established player who is not a only a market lead but also a company employing sheet breath in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factories will take this company out of the list of comparables. We therefore accept the contention of the assessee that this company cannot be regarded as a comparable. Similar view was also taken in case of Symphony Marketing Solution India (Pvt.) Ltd. (supra) by the Banglore Bench. Therefore, we direct the Assessing Officer/TPO to exclude the same." 5.4 Accordingly, in view of the judicial precedents cited above we direct the AO/Ld. TPO to exclude BPO Infosys Ltd from the final set of comparables." 25. The learned authorised representative has also relied upon the several judicial pr....
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....oss account at page number 6 of the annual report the revenue from business process management services is Rs. 1312 crores whereas the turnover of the assessee is Rs. 626 crores. Therefore, we do not find multiple- X difference in the turnover of the company to exclude this company on the issue of turnover. However there is a brand expenditure incurred by Infosys BPO Ltd and therefore in pricing of the products of that comparable company brand plays an important part. The learned departmental representative though argued that appellant has also a bigger global brand however; no supporting documents were produced before us to prove it. The another important aspect of this comparable company is that its parent company Infosys Ltd has issued a performance guarantee to certain clients for the company's executive contracts. This is evident at page number 19 of the annual report of the comparable. The performance of the company, if backed by the global leader, like the parent of the comparable company i.e. Infosys Ltd, it clearly shows that comparable company has the distinct advantage of the brand of Infosys Ltd as well as the support and backing of a global leader. Against this, the ap....
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....icial precedents:- i. HC against AAR ruling reported in 386 ITR 390 [Pg 811-823] ii. HC for AY 2010-11 in ITA No. 762/2017 [Pg 805-807] iii. HC for AY 2011-12 in ITA No. 380/2017 [Pg 808-810] iv. Tribunal for AY 2015-16 in ITA No. 6687/Del/2019 [Pg 133-174 of CL PB] 32. The learned authorised representative took us through all the judgments stated above submitted in the case law paper book at various pages to show that the issue is covered in favour of the assessee. 33. The learned departmental representative relied upon the orders of the lower authorities. 34. We have carefully considered the rival contention and perused the orders of the lower authorities as well as the various judicial precedents cited before us in assessee's own case. 35. Brief facts shows that during the year the assessee has incurred expenditure of Rs. 200,373,067/- as remuneration for management services to its group entity but no tax has been detected at source. On 15 March 2011, the assessee company made an application u/s 245Q (1) to the Authority For Advance Ruling [ AAR] with respect to the taxability of managerial remuneration payable to group entity, a partnership firm registered in France....
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....ce which formed part of the Double Taxation Avoidance Agreement between the two countries was interpreted. It was held by the Income-tax Appellate Tribunal, and in the view of this court correctly, that the benefit of the lower rate or restricted scope of fee for technical services under the Indo-French Double Taxation Avoidance Agreement was not dependent on any further action by the respective Governments. It was held that the more restricted scope of fee for technical services as provided for in a Double Taxation Avoidance Agreement entered into by India with another OECD member country shall also apply under the Indo-French Double Taxation Avoidance Agreement with effect from the date on which the Indo-French Double Taxation Avoidance Agreement or such other Double Taxation Avoidance Agreement enters into force. 21. It has been contended by Mr. Chaudhary that the question as to the exact nature of the services provided by the petitioner under the management services agreement has not yet been examined by the Authority for Advance Rulings. It is further pointed out that the contention raised regarding Steria France having a permanent establishment in India and its income being....
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....igh Court for assessment year 2010 - 11 and 11 - 12. Therefore respectfully following decision of Coordinate bench where those orders were rendered following decision of Honourable High court, We hold that assessee is not liable to deduct tax at source on the above payment and therefore disallowance u/s 40 (a) (i) is not warranted . Thus, ground number 3 of the appeal of the assessee is allowed. 37. Ground number 4 of the appeal is against partial disallowance of deduction u/s 10 AA of the act. The assessee has claimed deduction of Rs. 123,093,420 against which the learned assessing officer allowed the deduction to the extent of Rs. 114,034,006. The reasons for restricting the above disallowance is that the learned assessing officer has excluded foreign exchange outgo of Rs. 53,390,915/-, telecommunication charges of Rs. 282,619, subsistence allowance for on-site employees of Rs. 129,26,932/- and standby and callout charges of Rs. 33,842,787/- totaling to Rs. 98,443,288/- from the total turnover for the purpose of computing deduction u/s 10 AA of the act. The claim of the assessee is that both the export turnover and total turnover for computing that deduction under this Section s....
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....d that assessee has booked the loss on account of Mark to market exchange fluctuation on forward cover contracts amounting to Rs. 24,59,04,852/- . The learned assessing officer noted that assessee has entered into several forward contracts in respect of foreign-exchange which have not been closed or match order till the end of the financial year 2011 - 12 and such forward contracts in respect of foreign-exchange has been re-evaluated as on the end of the year and corresponding loss has been booked. The learned assessing officer further referred to instruction number 3/2010 dated 23 March 2010 stating that above is contingent in nature. The assessee submitted that above instruction does not apply to the assessee for the reason that the forward exchange forward contracts are financial instruments whose values are affected by the change in rates of foreign currencies and are not speculative in nature. Assessee further submitted that it has booked the above loss in view of the accounting standard wherein the companies are required to account for Mark to market losses in their books. The assessee further relied upon the several judicial precedents. However the learned assessing officer ....
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....oice: "Revenue" is defined as inclusive of (a) Revenue as per clause 3.3.1 (b) Foreign exchange currency gain/loss if any (c) Other income earned out of regular business operations and (d) Top-up value to arrive at agreed return. Non-operational and other income, if any will be excluded for determining revenue for the purpose of determining the agreed return." From the aforesaid agreement, it can be ascertained that the cost element specifically excludes the amount of gain/ loss incurred in foreign exchange currency and therefore, the cost of forward contract is nothing but the actual amount of cost which has been incurred by the assessee company and there is no mark-up charged on the said cost which can be said to be received by the assessee company. Further, apart from the recovery of cost, revenue includes amount of gain/ loss incurred in foreign exchange along with other income earned by the assessee company from the regular business operations. Ld AR furnished certificate issued by an independent chartered accountant to demonstrate the revenue computation mechanism to evidence that revenue includes foreign exchange currency loss and accordingly, the loss suffered by the app....
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....sing officer would have, in accordance with the directions of DRP, allowed the claim of the applicant in toto. Thus, it is respectfully submitted that the partial relief granted to the appellant deserves to be allowed in whole on the basis of submissions stated herein above. In accordance with the agreement entered into, the rates charged by the assessee company are deemed all-inclusive, and no separate expenses related to infrastructure and support services are to be charged to Steria Ltd, UK. However, where the assessee company incurs any expenses on behest of Steria Ltd UK, the same will be charged by the assessee company to Steria Ltd UK without any profit (any such expenses by Steria India Ltd will be based on/ subject to its own internal policies and procedures). The aforesaid contention of the assessee company can be explained with the help of following table: Normal scenario Loss scenario Profit scenario Profit & Loss scenario Particulars Amount Amount Amount Amount Revenue 100 100 100 100 Catch-up 14 34 [20+14] 8 [-6+14] 33 [24-5+14] Total Revenue (A) 114 134 108 133 Cost Excluding FX Impact 100 10....
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....relevant to the assessment year 2012-13, followed the strategy of hedging foreign currency denominated export realizations by taking forward covers. Since these forward covers were taken by the appellant from various banks, the counter party in these forward cover contracts was the bank. Such forward covers are taken by the appellant to hedge the foreign exchange risk associated with the forecasted export realizations, which were expected to be realized during the corresponding period. Since the forward contracts remained outstanding as at the end of the year and were not squared off during the relevant year, the foreign exchange loss arising because of foreign exchange fluctuation between the date on which it was booked and the balance sheet date was debited to Profit & Loss Account. The aforesaid accounting treatment was also in line with the Accounting Standard-30 on "Financial Instruments: Recognition and Measurement" read with AS-11 on the "Effects of changes in Foreign Exchange rate" issued by the Institute of Chartered Accountants of India ('ICAI') providing that loss/gain on outstanding forward/derivative contracts are to be recognized on mark to market basis. Accordingly, ....
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.... rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realised from, or required to disburse, a foreign currency monetary item at the balance sheet date, e.g., where there are restrictions on remittances or where the closing rate is unrealistic and it is not possible to effect an exchange of currencies at that rate at the balance sheet date. In such circumstances, the relevant monetary item should be reported in the reporting currency at the amount which is likely to be realised from, or required to disburse, such item at the balance sheet date; (b) non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction; and (c) non-monetary items which are carried at fair value or other similar valuation denominated in a foreign currency "36. An enterprise may enter into a forward exchange contract or another financial instrument that is in substance a forward exchange contract, which is not intended for trading or speculation purposes, to establish the amount of the reporting currency required or available at the settlement date....
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....e contracts not intended for trading or speculation purposes The premium or discount arising at the inception of forward exchange contracts (except outstanding against form commitments and highly probable forecast transaction) is amortized as expense or income over the life of the contract. Exchange differences on such contracts are recognized in the statement of profit and loss in the period in p) Derivative Instruments As per the ICAI Announcement, accounting for derivative contracts, other than those covered under Accounting Standard 11 are marked to market on a portfolio basis, and the net loss after considering the offsetting effect on the underlying hedge item is charged to the income statement. Net gains are ignored. Accounting policy for forward exchange contracts is given in point (iv) of note (h) above." 45. It is further respectfully submitted that the aforesaid loss represents crystallized loss as on the balance sheet date for the relevant assessment years and hence allowable as business loss while computing the taxable income, as elaborated hereunder: (i) kind attention is further invited to section 145(1) of the Act which provides that income chargeable under the....
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....e Court in the decision of Oil & Natural Gas Corporation Ltd. vs. CIT: 322 ITR 180 wherein it was held that where the assessee was following the mercantile system of accounting, the loss on account of fluctuation in exchange rate is allowable revenue deduction in the year of accrual. (vii) kind attention, in this regard, is further invited to the decision of Delhi High Court in the matter of Munjal Showa Ltd. v DCIT: 382 ITR 555 wherein the Court while quashing the reassessment proceedings, accepted the assessee's claim of MTM loss on revaluation of foreign exchange derivatives as the assessee recognized such loss by following mercantile system of accounting as per section 145 of the Act and followed AS-11 and AS-30 issued by ICAI. The Court further held that the CBDT instruction could not override the existing decisions of Supreme Court and High Courts on similar issues. (viii) The Bombay High Court in the case of V.S. Dempo and Co. (P) Ltd.: 206 ITR 291 has succinctly culled out the principles to determine whether loss on account of exchange fluctuation is allowable as business loss. The Court inter-alia held that "(i) a loss arising in the process of conversion of foreign cu....
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.... - DCIT vs. Kotak Mahindra Investment Ltd: 59 SOT 4 (Mum) - Quality Engineering & Software Technologies (P.) Ltd. vs. DCIT: 152 ITD 320 - ACIT vs. Sri Ramalingeswara Rice & Oil Mill: 162 ITD 696 (Visakhapatnam) - Inventurus Knowledge Services (P.) Ltd. vs. Income Tax Officer: 45 ITR(T) 57 (Mum) (xiii) Having regard to the aforesaid settled legal position, loss or gain arising on trading account due to exchange rate fluctuation is, in our respectful submission, to be treated on revenue account and is allowable as deduction/ taxed as income, as the case may be. Further, as laid down in the aforesaid decisions, the increase/decrease in liability due to exchange fluctuation has to be recognized in the year in which such increase/ decrease takes place. 46. In the case of the appellant, the forward contracts were booked to hedge against the foreign currency fluctuation risk relating to business transactions, viz., export orders undertaken by the assessee and hence taking of the aforesaid hedge cover was incidental to its business. Further, since the forward contracts were related to the export proceeds, whether backed by invoice or in relation to expected receivables, the same w....
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....sses are because of speculative transactions as specified under section 43(5) of the Act or whether contacts were used to hedge currency exposure. As regards the issue of allowability of mark to market losses dealt with by the instruction, it is respectfully submitted that the said issue is no longer res-integra in view of the decision of the Supreme Court in the case of Woodward Governor (supra). It is respectfully submitted that it is a settled law that circular/ instruction issued by the Board cannot override the position of law as explained in the binding decisions of the Supreme Court/ High Court on the similar issues. Reliance in this regard is placed on the judgment of the Hon'ble Supreme Court in the case of Hindustan Aeronautics Ltd v. CIT : 243 ITR 808, wherein the Court concurred with the view that though circulars or instructions given by the board are binding in law on the authorities under the Act but when the Supreme Court or the High Court has declared the law on the question arising for consideration it will not be open to a Court to direct that a circular should be given effect to and not the view expressed in a decision of the Supreme Court or the High Court. To ....
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....ied) 51. In view of the aforesaid circumstances, reasoning adopted by the assessing officer, being contingent in nature, by primarily relying on Instruction No. 3 to disallow loss accruing or arising on account of foreign exchange transactions not yet matured, is incorrect as per law after due consideration of the aforesaid judicial precedents. The direction given in the said Instruction to disallow mark to market losses, therefore, it is respectfully submitted, cannot be the basis to disallow unrealized losses since: (a) the said disallowance would be in violation of the law laid down by the apex Court, which is binding on all the authorities; (b) any instruction issued by the CBDT directing a quasi-judicial authority to disallow a particular claim is violative of section 119 of the Act and hence not binding on the assessing officer and/ or the appellate authority; (c) the instruction issued by the CBDT being contrary to the decision of the apex Court, the Instruction must be regarded as having been overruled by the said decision. On perusal of the above, it is clear that the foreign exchange fluctuation loss claimed on mark to market basis on the closing balance sheet dat....
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.... assessee has not claimed any expenditure on account of Mark to market losses. Further, the direction of the learned dispute resolution panel also says that the learned assessing officer should disallow only the net amount of expenditure debited to the profit and loss account on account of Mark to market foreign exchange losses. The claim of the assessee that it is not debited any expenditure but recovered everything from its associated enterprise and therefore it needs verification. 56. The learned authorised representative reiterated that that Mark to market losses incurred by the appellant has been fully recovered from its Associated Enterprises ('AEs'). In this regard, he submitted as under: 1. The appellant suffered MTM loss of Rs. 24,59,04,852, which is included in the net loss of Rs. 19,00,50,366 debited to Profit & Loss Account. The relevant extracts of audited financial statements along with break-up of the foreign exchange loss are enclosed herewith as Annexures 1 and 2 respectively (also placed at Pages 667 and 799of Merit PB-II respectively). 2. As per Clause 3 of the 'Software Products and IT/ ITES Services Agreement' dated 01.04.2010 entered into between the appe....
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....gn exchange loss to the net foreign exchange loss which is a finally been debited to the profit and loss account. The learned dispute resolution panel also made it clears that if the assessee has debited excess amount on the foreign exchange loss and is credited why amount being reimbursed by the associated enterprise of foreign exchange loss to the profit and loss account than disallowance should be restricted to only X-Y. Clause 3 of the 'Software Products and IT/ ITES Services Agreement' dated 01.04.2010 entered into between the appellant and Steria Limited, UK, the loss suffered by the appellant company is fully recoverable by the appellant from its AEs, without any mark up. Assessee also contested by submitting certificate dated 12.10.2016 issued by statutory auditors of the appellant, wherein having regard to the revenue computation mechanism followed by the appellant, it has been certified that that the revenue recorded in the books of account includes recovery of the foreign exchange currency loss suffered by the appellant in terms of sub-clauses 3.3.2 of the agreement with AEs. Assessee has also made available back-up working of the certificate comprising of segment wise ....
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....filed by the assessee for assessment year 2013 - 14 wherein following grounds of appeal are raised:- "1. That the assessing officer erred on facts and in law in completing assessment under section 144C read with section 143(3) of the Income-tax Act ("the Act") at an income of Rs. 147,63,84,824 as against the returned income of Rs. 123,46,67,790. Transfer Pricing Issues: Software Development Service Segment 2. That the assessing officer erred on facts and in law in making an adjustment of Rs. 23,42,50,069 to the arm's length price of the 'international transaction' of provision of software development services on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer ('IPO'). 2.1 That the DRP/TPO erred on facts and in law in considering the following companies in the final set of comparables for the purpose of benchmarking analysis not appreciating that these companies are functionally not comparable to the appellant: a. Larsen & Toubro Infotech Ltd. (seg) b. Mindtree Ltd. c. Thirdware Solutions Limited 2.2 That the DRP upheld the inclusion of Larsen & Toubro Ltd. (seg) allegedly holding that broad functional similarity is to....
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....66 Standby and callout charges 21,50,660 » 21,50,660 Total 7,22,96,526 3.2 That the DRP/ assessing officer erred on facts and in law in not appreciating that both the 'export turnover' and 'total turnover' have to be computed on the same basis for the purpose of computing deduction under section 10AA of the Act. 3.3 That the DRP/ assessing officer erred, while making the purported adjustment from "the export turnover", following the assessment order for preceding assessment years, without appreciating that the said issue has already been decided by the ITAT in favour of the appellant in assessment year(s) 2003-04 to 2011-12. 4. That the assessing officer has erred on facts and in law in allowing short credit of advance tax paid to the extent of Rs. 97,70,469/-. 5. That the assessing officer erred on facts and in law in levying interest under Section 234B and 234D of the Act." 61. The brief facts of the case shows that assessee filed its return of income on 30 November 2013 declaring total income of Rs. 1,234,667,790/- the assessee has entered into eight different kind of international transactions. The only dispute is with the international transaction of th....
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....icing document the assessee is shielded from any loss on account of foreign exchange fluctuation with respect to the transactions with its associated enterprises and therefore the foreign exchange risk remains on the assessee only to the extent of services provided to 3rd party. Therefore, the operating profit or loss gain be adjusted only to the extent of foreign exchange loss or gain earned by the assessee on its transactions with third parties and not with associated enterprises. 65. We have carefully considered the rival contention and perused the order of the coordinate bench in case of the assessee for assessment year 2015 - 16 wherein in para number 5.6 the issue of whether the forex is an operating income or loss was discussed with respect to ITeS segment. However, there was no issue before the coordinate bench with respect to IT services as the issue in the impugned appeal. For the purpose of considering the forex loss whether it is a part of operating income or loss one has to see whether the assessee was shielded from any loss on account of foreign exchange fluctuation with respect to its transaction with associated enterprises are not. The forex can be considered as an....
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....hat is no question of giving an allocation Kiefer unallocated expenditure. In case of a corporate, there may be certain expenditure, which are not at all to be allocated to the any of the segments, and therefore only for this reason the segmental results cannot be rejected. He further stated that the several judicial precedent raised by the learned authorised representative are not relevant as the functional profile of the assessee is not comparable with those assessees. He once again reiterated the principle regarding the exclusion of or inclusion of any comparable should be made only qua the functions performed by the assessee and not on the basis of certain judicial precedents, which have dealt with different functional profile of different assessee. 69. We have carefully considered the rival contentions. We fully agree with the contentions principally that the comparability analysis should be restricted to the functional profile of the assessee with the functional profile of the comparable companies. It cannot be that a judicial precedent in case of some other assessee who has a different and distinct functional profile and where a comparable company has been excluded, the sa....
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..... Accordingly, the segmental information of this comparable was presented. The assessee is objecting that it has certain unallocated expenses and therefore the comparison of the industrial cluster segment with the assessee though functionally comparable but for this reason this comparable should be excluded. We do not agree with this argument of the learned authorised representative. This information is provided in the annual accounts of the comparable in terms of Accounting Standard 17 "Segment Reporting". This stanadard is mandated as per law by the Ministry of Company affairs, therefore it have binding effect of a law. The expenses should be allocated in terms of that standard for preparing of segment reporting as per following provision of that standard:- " 5.6 Segment expense is the aggregate of (i) the expense resulting from the operating activities of a segment that is directly attributable to the segment. (ii) the relevant portion of enterprise expense that can be allocated on a reasonable basis to the segment, including expense relating to transactions with other segments of the enterprise. Segment expense does not include: (a) extraordinary items as defined in ....
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....be certain unallocated expenses, which are never allocated to any of the segment. The reason is that that expenditure does not belong to the segment and should not be considered in the profitability of that segment. Therefore, for the simple reason that there are unallocable expenses, which are, not related to any of the segment, on this ground the comparable should be excluded. We are of the view that unless there is a specific qualification by the auditor of not following the relevant accounting standard with respect to the segmental information then only there can be doubt on the audited financial statement of the comparable company. In this case the segmental information has been accepted by the directors in their directors report while discussing the performance of the company, the auditor has also stated that proper accounting standards have been followed which also includes accounting standards with respect to the segmental information and further the disclosure made by the comparable company at note number AB at page number S - 653 and 654 does not show any infirmity, on this ground, this comparable cannot be excluded. Hence, this argument is rejected. 72. The last point r....
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....g 115 of annual report paper book).In the annual report it is further stated that the company is engaged in providing solutions in the form of proprietary products / technologies such as MindTest, Mwatch, mpromo etc. (Pg 37 of Annual Report paper book). Further, the company has a proprietary delivery platform namely ONEmind (Pg. 39 of Annual Report paper book). In addition, the company has filed numerous patents in India as well as in the USA (Pg 76 of annual report paper book). Accordingly, it is submitted that since the company has developed and it owns various proprietary products &platforms and has filed for various patents, it cannot be regarded as an appropriate comparable for the purpose of benchmarking the international transactions undertaken by the appellant, a captive software service provider. 75. The learned departmental representative submitted that assessee has taken this company is functionally comparable its transfer pricing study report and assessee is also not cite any specific and reason as to why it's study report with respect to this comparable is wrong. He further submitted that the objection of the assessee have also been considered by the learned transfer ....
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.... the company and further there are unallocable expenses of Rs. 401.12 lakhs. However on looking at the direction of the learned dispute resolution panel at page number 6 and 7 we find that the is no such argument advanced by the assessee on this comparable as advanced before us. Even otherwise, in view of our finding with other comparable, we do not see it correct to exclude a comparable on unallocable expenses . In segment reporting this is mandate of As 17 and Law. On looking at the revenue recognition note at page number 72 of the standalone financial statement of this comparable it is found that its revenues are from software development and implementation. Further comparison of the overseas segment also not suffer from any infirmity because assessee is also providing services to its overseas associated enterprises. In view of this, we do not find any infirmity in inclusion of this comparable company by the lower authorities. 79. The next challenge is the rejection of the comparable by the learned transfer-pricing officer of CAT technologies Ltd stating that it is incurring persistent losses. The learned authorised representative submitted that merely because companies incurri....
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....ut charges of Rs. 72,296,526 from the total turnover. The learned dispute resolution panel also upheld the finding of the learned assessing officer. the appellant, for the purpose of computing allowable deduction under section 10AA of the Act, reduced those expenditure, incurred in foreign currency, from both 'export turnover' as well as the 'total turnover' of each of the units. The learned assessing officer computed the deduction allowable under section 10AA of the Act from Rs. 18,83,49,607 to Rs. 18,08,82,642 on the ground that subsistence for onsite employees and standby and callout charges needs to be reduced from the value of 'export turnover' but not from 'total turnover' for the purpose of computing deduction under section 10AA of the Act on the basis of detailed reasoning given in order for assessment year 2003-04 and consistently applied to later years. 83. The learned that authorised representative submitted that adjustment in deduction under section 10AA of the Act by the Hon'ble DRP/ assessing officer is incorrect having regard to the scheme of the said section; Circular No. 4/2018 dated 14th August 2018 and decisions of the Hon'ble Supreme Court in the case of CIT v.....
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....tions' of provision of software development services undertaken with the associated enterprise on the basis of order passed by the Transfer Pricing Officer ('TPO')/ Dispute Resolution Panel ('DRP'). 3. That the DRP/ TPO erred on facts and in law in resorting to cherry picking and considering following companies in the final set of comparable companies allegedly holding them to be functionally comparable to the Appellant. a. Larsen & Turbo Infotech Ltd. (Seg) b. Thirdware Solutions Limited c. Persistent Systems Limited d. Cybercom Datamatics Information Solutions Ltd. e. Tata Technologies Ltd. f. ABM Knowledgeware Ltd. g. Technosoft Engineering Projects Ltd h. Wipro Ltd i. Sasksen Technologies Ltd (Seg) j. Mindtree Limited 4. That the DRP/TPO erred on facts and in law in not appreciating that Tata Technologies Ltd fails the TPO's related party transaction filter and therefore is liable to be rejected from the final set of comparable companies. 5. That the DRP/TPO erred on facts and in law in not appreciating that ABM Knowledgeware Ltd fails the TPO's export/sales filter and therefore is liable to be rejected from the final set of comparable companies. 6. ....
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.... facts and in the circumstances of the case and in law, the DRP/ assessing officer erred in disallowing under section 40(a)(i) of the Act, expenditure of Rs. 20,60,44,024 incurred on account of management services fees, allegedly on the ground that the appellant failed to deduct tax at source therefrom under section 195 of the Act. 11.1 That the DRP/ assessing officer erred on facts and in law in holding payment made to Groupe Steria SCA ('Steria France') towards management services fees to be in nature of Fees for Technical services ('FTS') in terms of Article 13 of India-France Double Tax Avoidance Agreement ('DTAA') read with Protocol thereto. 11.2 That the DRP/ assessing officer erred on facts and in law in erroneously relying upon the order of the Authority of the Advance Ruling ('AAR') without appreciating that the findings of AAR are perverse in light of the favorable order passed by the jurisdictional Delhi High Court in appellant's own case. 11.3 That the DRP/assessing officer erred on facts and in law in not appreciating that the Protocol to India-France DTAA is an integral part of the treaty and does not require separate notification to be issued by Government of I....
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....n law and on facts in not appreciating that the disallowance provisions under section 40(a)(i) of the Act are applicable only in relation to amounts 'payable' as at March 31 and not in relation to amounts 'paid' during the year. 12.3 Further without prejudice to the above, the DRP / assessing officer further failed to appreciate that disallowance under section 40(a)(i) of the Act was, in any case, not warranted, since non-deduction of tax was on account of bona fide view taken by the appellant. 13. That the assessing officer has erred on facts and in law by not allowing credit of Tax Deducted at Source ("TDS') to the extent of Rs. 6,81,000/-. 14. That the assessing officer erred on facts and in law in levying excess interest under section 234B of the Act." 91. The assessee has raised an additional ground of appeal stating that on the facts and circumstances of the case and in law, the impugned order passed by the assessing officer is barred by limitation and therefore is liable to be quashed. 92. This is identical to the ground raised in assessment year 2012 - 13 and 2013 - 14. For all those years, we admitted this ground and dismissed it following the order of the coor....
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....spect to the arm's-length price of the software services of Rs. 295,000,656 (ii) disallowance of deduction u/s 10 AA of the act of Rs. 1,536,691 (iii) disallowance/addition on account of payment of management and services fees to group company Rs. 206,044,024/- (iv) Disallowance u/s 40 (a) (ia) of Rs. 100,197,482. 98. Ground number 2 - 9 of the appeal is with respect to the challenge to the transfer pricing adjustment of Rs. 295,000,656/- of the international transaction of provision of Software Development Services. After the direction of the learned Dispute Resolution Panel following comparable remains. S.No. Name of the Company OP/OC (%) 1. ABM Knowledgeware Ltd 39.42% 2. Akshay Software Technologies Ltd 0.15% 3. CG VAK Software & Exports Ltd 8.94% 4. Cigniti Technologies Ltd 27.39% 5. Comviva Technologies Ltd 18.95% 6. CybercomDatamatcis Information Solutions Ltd 87.03% 7. Larsen & Toubro Infotech Ltd (seg) 34.09% 8. Mindtree Ltd 20.46% 9. Persistent Systems Ltd 37.56% 10. Sasken Technologies Ltd 33.20% 11. Tata Elxsi Ltd 19.77% 12. Tata Technologies Ltd 32.86% 13. Technosoft Engineering Projects 17.38% 14. Thirdware Solution L....
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....With respect to Wipro Limited ld AR submitted that Wipro Ltd is engaged in provision of IT Services, including Business Process Outsourcing (BPO) services and IT Products (Pg 113 of annual report). It is further submitted that segmental financial statements at standalone level are not available in the case of this company. At page 143 of the annual report it is clearly stated that the segmental accounts have been prepared at consolidated level. It is further submitted that even within the IT services segment (consolidated), the company has included revenue from BPO services (Pg 176 of annual report). In view of the aforesaid, it is respectfully submitted that this company cannot be regarded as comparable for the purpose of benchmarking analysis. It was stated that Wipro Ltd. owns significant intangibles in the form of brand, trademarks, patents and technical know-how etc. and therefore, the company cannot be regarded as comparable for the purpose of benchmarking analysis. At page 44 of the annual report, the company has stated that during the year it has applied for 118 new patents and was granted 18 new patents against its existing patent applications. Further, the company has sep....
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....fically stated that company is engaged in the two business segments namely information technology and information technology enabled services. Functional similarity has already been shown if segment information is available then such comparable is required to be retained. 108. We have carefully considered the rival contention and perused the standalone financial statement of the above comparable company placed at page number 202 - 323 of the paper book. It is apparent that in statement of profit and loss account placed at page number two of the annual accounts in XBRL format that company has disclosed revenue from sale of products of Rs. 20,675 lakhs. However looking at the foot not placed in the sub- classification and notes on income and expenditure it shows that it is an export of service of Rs. 20,194 lakhs, software services from local unit of 414 lakhs and revenue from subscription and training of 59.32 lakhs and sale of license of 7.98 lakhs. However, there is a basic discrepancy/ anomaly in the statement of profit and loss account and footnote given there under. Where there are inconsistencies in the annual accounts, itself of a comparable company from which it is not poss....
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.... the assessee. 111. We have carefully considered rival contentions and orders of TPO/ Directions of DRP. This comparable has been considered by us in the appeal of the assessee for assessment year 2013 - 14 wherein we have held that mind tree Ltd is a functionally comparable to the functions performed by the assessee. Further, it is not engaged in any sale of products on perusal of the standalone financial statements, we do not find any such a reference in its revenue. This too is the finding of the ld DRP. In the standalone balance sheet, also nothing was pointed out before us to show that it is engaged in the sale of products. Learned dispute resolution panel at its direction at page number 5-6 has also categorically held that it is functionally similar. With respect to the intangibles, it is stated that it includes only the software, which are used for the purposes of the business of the company. The learned dispute resolution panel has also categorically held that functions performed, assets employed and risks assumed does not have any the similarities. No infirmity was pointed out in the direction of ld DRP with reference to standalone annual report of the comparable. Therefo....
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....ross the export filter. If the claim of the assessee is found correct, Tata Technologies may be excluded. 115. In case of Persistent Systems, limited ld AR submitted that Persistent Systems Ltd. is engaged in the business of development and sale of software products and therefore, cannot be regarded as comparable to the assessee, a routine software service provider. At page 27 (Pg 192 of Annual Report paper book) it is stated that the company specializes in building software products and the business of the company is inter-alia focused on products. Also, at page 105 (Pg 270 of annual report paper book) of the annual report it is stated that the company derives significant portion of its revenue from export of software services and products (IP based software products). It is further submitted that at Page 164 & 183 of the Annual report it is stated that the company specializes in software products, services and technology innovations. It is further submitted that segmental profitability of this company from provision of software services is not available in the annual report and accordingly, Persistent Systems Ltd cannot be regarded as an appropriate comparable for the purpose of....
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....y ld DRP and TPO. 119. In case of sasken Communications Limited, it is submitted that this company owns IPR, numerous patents and has branded products and accordingly, cannot be compared with a captive service provider. It is further submitted that the company is engaged in significant R&D activity leading to creation of IPRs and consequently higher profitability. It is submitted that the TPO has considered the software services segment as comparable for the purpose of benchmarking analysis. (Segmental information at pg 50 of the annual report)However, it is submitted that the information required for allocation of common expenses is not available in the public domain. Accordingly, it is submitted that in the absence of availability of appropriate allocation keys, this company cannot be regarded as an appropriate comparable. 120. The learned departmental representative vehemently stated that this comparable has been selected by the assessee in its transfer pricing study report. Therefore, according to the assessee itself it is functionally comparable. Further, the argument of the intangible assets owned by that company has been taken up for the first time. The argument of the seg....
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....tion keys are not available is devoid of any merit as well as not in accordance with the provisions of the companies act and accounting standards mandated by the Ministry of corporate affairs. Further, the learned authorised representative has stated that there is no estoppel under the income tax proceedings seeking exclusion of this comparable company, even though the same has not been disputed in the earlier years order was taken as a comparable company in the TP study itself. Firstly, we hold that it is the filter applied on database that would determine the comparable is functionally comparable or not. Assessee as adopted TNMM as MAM. There is no denial on this principle but it is for the assessee to prove that under which accepts/reject metrics of the comparability analysis, this comparable company was included and how it passed at that particular filter then and how it fails now. However, as the complete annual financial statement on standalone basis of the comparable company is not available, we direct the assessee, as it is the comparable selected by assessee, to submit the standalone financial statement of the comparable company and direct the learned Transfer Pricing Offi....
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....r 25 - 45 of the paper book dated 9 June 2020. The revenue stream shown by the profit and loss account is sale of services having gross turnover of Rs. 14.69 crores. The revenue recognition is also shown that it earns its revenue from technical and software services. The assessee has referred to the general note number 1A wherein the assessee is described as consultant and advisor however, it is deriving its income from sale of services and the revenue recognition policy of the company also supports that. Further, the learned Dispute Resolution Panel also noted note number 23 wherein specifically it is mentioned that the principal business of the companies providing technical and software services only. In view of this, we do not find any dissimilarity in the functions of the assessee compared to this comparable company. Hence, the same is correctly included in the comparability analysis by the lower authorities. 125. In case of Larsen & Toubro InfoTech Limited he submitted that company enjoys the benefits associated with the brand 'Larsen & Toubro' and therefore cannot be regarded as comparable to the appellant, a captive service provider. In the annual report, the company has st....
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....ertaken restructuring activity during the year and also on the basis that in the absence of allocation keys, segmental accounts of this company cannot be relied upon for the purpose of benchmarking analysis. 126. The learned departmental representative submitted that assessee has included this comparable company in its TP study report is a valid and functionally similar. The computational error is have also been rectified, segmental analysis are shown, the issues raised in here are not raised by the assessee before the lower authorities. He therefore submitted that this company is a perfect comparable to the assessee. 127. We have carefully considered the rival contentions and perused the orders of the lower authorities. Same comparable has been considered by us in this order itself wherein we have held that this comparable is correctly included by the lower authorities for the comparability analysis of the determination of arm's-length price of the international transactions. For reasons given by us therein in this order, we hold that this comparable company has been correctly included. However, we note that for this year assessee has also challenged this comparable on one more ....
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....ng officer at Rs. 229,737,129/- the only issue is with respect to the foreign currency expenditure in the nature of telecommunication charges of Rs. 115,22,112 which have not been excluded by the learned that assessing officer from the total turnover of SEZs unit for computing deduction. The claim of the assessee is that both the export turnover in total turnover held to be computed on the same basis for the purpose of computing deduction. 130. The learned that authorised representative submitted that this issue is squarely covered in favour of the assessee by the decision of the honourable Delhi High Court in assessee's own case for assessment year 2004 - 05 to 2011 - 12. 131. The learned departmental representative vehemently supported the order of the lower authorities. 132. On careful consideration of the issue before us, it is found that this issue has been squarely covered in favour of the assessee that the export turnover in total turnover should be taken on the similar basis for computing the deduction u/s 10 AA of the income tax act. The appellant had, during the year under consideration, claimed deduction under section 10AA of the Act aggregating to Rs. 23,12,73,820 in....
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.... services fees for non-deduction of tax u/s 40 (a) (i) of the act amounting to Rs. 206,044,024 incurred on account of management services fees, held to be fees for technical services on which tax deduction at source u/s 195 of the act should have been done by the assessee and therefore disallowance was made. The learned dispute resolution panel also upheld the order of the learned assessing officer holding that payment made to groupe Steria SCA France is also in the nature of fees for technical services in terms of article 13 of the India France double taxation avoidance agreement read with protocol thereto. The above finding of the learned dispute resolution panel was based on the order of the authority of the advance ruling. The above issue was challenged before the honourable High Court against the order of authority for advance ruling and honourable High Court decided this issue in favour of the assessee. The identical issue arose in the case of the assessee for certain other years wherein the coordinate bench, following the order of the honourable High Court, decided the issue in favour of the assessee holding that assessee is not required to deduct any tax at source u/s 195 o....
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....id agreement, the assessee has purchased certain software licenses from France company in the course of the year, which as per invoices were as Under:- Xxxxxx Xxxxxx Xxxxxxx 2.5 .2 .3 now, software is an intellectual property (IP) which can be licensed to a user. The same software can be given to any number of users. On an outright sale of an article like hardware, property in its entirety is transferred to the purchaser to the exclusion of others, whereas, in software there is no such thing as outright sale, what is transferred is only the right to use, which may be available to many such users but the IPR still remains intact with the supplier. Copyright is not an indivisible bundle, but consist of discrete rights bundled together. Any right in respect of a copyright can be conferred because a copyright is a bundle of rights which may be divided and assigned, or restrained involved or in parts. If the entire copyright itself, an undivided part of share of the entire copyright, or rights Under a copyright in a specified geographical region has been conveyed, it would be an assignment, but when the right to use has been given it would be a license, which is nothing but a ri....
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....n involved is in the nature of royalty within the meaning of clause (iii) of explanation 2 to Section 9 (1) (vi) of the act, and also within the meaning of royalty as define Under article 12 of DTAA, we are in agreement with the AO that the assessee was required to withhold the tax as per law. 2.5.3 the disallowance u/s 40 (a) (ia) of the act is therefore restricted to Rs. 100,197,482/-." 135. Thus, as the addition is made by the learned assessing officer in the assessment order, the assessee is in appeal before us. The learned authorised representative submitted that:- "The appellant is engaged in the business of providing information technology solutions in India and abroad. The appellant requires various hardware(s) and software(s), from time to time. In order to meet such requirements, in a cost effective mechanism, the appellant had entered into an Intra-Group Supplier Agreement ("the Agreement") with Steria France, a Partnership Limited by Shares, incorporated under the laws of France. Steria France had negotiated with external suppliers and subscribes centralized purchases from them, in the interest of all its group affiliates. The objective for undertaking centralize....
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....tificate issued to Groupe Steria SCA for calendar years 2013 and 2014 by French tax authorities The assessing officer, vide remand report dated 05.04.2018, held that the licenses claimed to have been purchased by the appellant falls in the ambit of definition of 'Royalty' as provided in Explanation 2 below the clause (vi) of section 9(1) of the Act and the appellant was required to withhold tax on the payments made thereon. In doing so, the assessing officer relied on the decision of Hon'ble Karnataka High Court in the case of CIT vs. Samsung Electronics Co. Ltd.: 345 ITR 494. The assessing officer, though acknowledging the fact that the issue was covered in appellant's favour by decisions of various High Courts, held that the issue is pending for consideration in various SLP's pending before the Apex Court. After considering the appellant's rejoinder dated 17.04.2018, the DRP upheld the aforesaid disallowance on the ground that Department's SLP against favorable decision of the jurisdictional Delhi High Court in the case of DIT v. Infrasoft Ltd.: 39 taxmann.com 88 is pending before the Apex Court. The aforesaid disallowance made the assessing officer/DRP is unsustainable and....
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....ance and the assessee we find that it is provided that the hardware and software purchases by Steria France is re-sold to the assessee without additional services and without any markup. Thus, there is no transfer of any right in respect of the copy of right and it is a case of mere transfer of a copy of righted article. The payment is in the purchase of license or a copy righted article and it represents only the purchase price and the same cannot be considered as royalty either under the Act or under the provisions of DTAA. It will be worthwhile to extract the following observations of the Hon'ble Delhi High Court from the judgment in the case of DIT vs. Infra Soft Ltd. (Del) (supra) at this juncture: xxxxxx 5.18 Accordingly, respectfully following the ratio of the judgment of the Hon'ble Delhi High Court in DIT vs. Infra Soft Ltd (supra), we are of the considered the opinion that tax was not required to be deducted at source in respect of the payment made to Steria France for the purchase of computer software license/s and therefore, in view of the above cited judgment we direct the AO/TPO to delete the disallowance. (emphasis supplied) In view of the position taken by the....