TaxTMI 
TaxTMI 
2020 (11) TMI 464
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....on 144C(5) of the Act for the Assessment Year ("AY") 2015-16, in so far as it is prejudicial to the interests of Goldman Sachs Services Private Limited ("GSSPL" or the "Appellant"), are not in accordance with the law, made in violation of the principles of equity and natural justice and are contrary to the facts and circumstances of the present case. 2. Adjustment under section 92CA of the Act 2.1 Rejection of the transfer pricing documentation of the Appellant 2.1.1 The Honorable DRP and the learned AO/TPO have erred in law and on facts by rejecting the Transfer Pricing ("TP") documentation which has been prepared by the Appellant with respect to Information Technology ("IT")&Information technology enabled service ("ITES") segment, in the manner contemplated under the relevant provisions of the Act and the Income-tax Rules, 1962 ("the Rules"). 2.1.2 The Honorable DRP and the Learned AO/TPO have erred in law in rejecting the TP Study of the Assessee as "not reliable or correct", under Section 92C(3) of the Act, merely because the learned TPO did not agree with the positions and filters adopted by the Assessee in its TP Study and adopted certain a....
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.... erred in law and facts by not rejecting Rheal Software Private Limited, which reports abnormal profits. 2.7 Companies selected for exclusion by the Assessee during the course of assessment proceedings in respect of IT service segment. The Honorable DRP and learned AO/ TPO have erred in considering the following companies as comparable to the Assessee, despite the same not being comparable to that of the Assessee due to various factors such as functional comparability, product / intangible led revenues, inadequate financial information, use of unreliable segment financials, extra ordinary events / business restructuring, abnormal year, judicial precedents etc. (i) Infobeans Technologies Limited (ii) Larsen & Toubro Infotech Limited (iii) R S Software (India) Limited (iv) Aspire Systems (India) Private Limited (v) Cybage Software Private Limited (vi) Infosys Limited (vii) Inteq Software Private Limited (viii) Mindtree Limited (ix) Nihilent Technologies Limited (x) Persistent Systems Limited (xi) Rheal Software Limited (xii) Tata Elxsi Limited 2....
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....delines for Multinational Enterprises and Tax Administration issued by Organization for Economic Cooperation and Development ("OECD Guidelines") in July 2017, United Nations Practice Manual on Transfer Pricing for Developing Countries (2017) ("UN TP Manual") and also a plethora of judicial pronouncements of Indian revenue authorities granting working capital adjustment while computing the arm's length price / net margin of comparable companies to remove any material differences on account of different working capital condition that exist between the comparable companies and the Assessee. 2.12 Risk adjustment 2.12.1 The Honorable DRP and learned AO / TPO have erred in not appreciating that the Assessee operates at less than normal risks as compared to comparable companies, which carry higher risks and accordingly erred in not granting appropriate risk adjustments. 2.12.2 The Honorable DRP and learned AO / TPO have erred in concluding that there exists a single customer risk and that such a risk nullifies any risk adjustment that could be provided. Further, the Honorable DRP and learned AO / TPO have erred in concluding that there is no reliable method to c....
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.... the disallowance made under section 14A of the Act, on similar facts has been deleted. 5. Disallowance under section 40(a)(i) of the act towards reimbursement of salary cost 5.1 The Honorable DRP and the Learned AO have erred in law and on facts in treating the reimbursement of salary costs of INR 48,35,91,738, as constituting 'consideration' for the alleged services being provided by the Appellant's overseas associated enterprise i.e., Goldman Sachs & Co ("GS & Co"), a resident of United States of America ("USA"). 5.2 The Honorable DRP and the Learned AO have erred on facts in not appreciating the submissions made submitted by the Appellant that the expatriate employees remain in the payroll of the Appellant and are also entirely controlled by the Appellant. 5.3 The Honorable DRP and the Learned AO have erred on facts in holding that the Appellant had entered into a Secondment Agreement with GS & Co, whereas no such agreement exists between the assesse and GS & Co. 5.4 The Honorable DRP and the Learned AO have erred on facts by not appreciating that the payment was not towards rendition of any service but represents mere reimbursement of sal....
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....t eligible to be claimed as deduction under section 80G of the Act." 3. The Brief facts of the case are that the assessee is subsidiary company of Goldman Sachs Mauritius LLC and Goldman Sachs (Mauritius) NBFC LLC and being part of the Goldman Sachs Group. The assessee is engaged in development of computer software and provides Software Development Services to the Associated Enterprises (AEs) outside India and has Information Technology Enabled Services (ITES) to support the business processes of the Goldman Sachs Group companies and the assessee company is compensated at Cost+ mark up of 16%. The assessee company filed the Return of Income for the Assessment Year 2015-16 electronically on 30.12.2014 with total income of Rs. 383,05,12,310/-. The case was selected for scrutiny under CASS and Notice under Section 143(2) and 142(1) of the Act were issued. On perusal of the Form No.3CB filed by the assessee, the Assessing Officer found there are international transactions with its AEs, and with prior approval of Prin.CIT-3, the matter was referred to the Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP).The assessee has filed the TP Study report, and as pe....
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....2.65 41.12 16 Cybage Software Pvt. Ltd. 68.17 68.82 60.81 66.27 35th Percentile 20.55% Median 27.37% 65th Percentile 37.90% 4. In ITES Segment, the TPO has selected 11 comparables referred at page 81 of the T P Order as under: S.No. Company Name F.Year wise OP/OC Wt. Average 2014-15 2013-14 2012-13 1 ACE BPO Services Pvt Ltd 2.21 1.40 3.21 2.38 2 Jindal Intellicom Limited 7.87 11.56 -2.84 5.44 3 Microgenetic Systems Limited 1.08 13.00 16.97 10.18 4 Crossdomain Solutions Pvt Ltd 15.23 21.18 22.43 18.81 5 Tech Mahindra BSPL 29.96 13.45 Fails RPT Filter 21.05 6 BNR Udyog (Seg) 6.62 27.40 35.80 23.26 7 A G S Health Pvt. Ltd. 25.35 No Data No Data 25.35 8 Infosys B P O Ltd. 26.16 27.43 29.31 27.45 9 S P I Technologies India Pvt. Ltd. 33.29 42.72 No Data 36.62 10 Excel Infoways Ltd. 2.55 27.97 70.07 39.97 11 F-Care India Pvt Ltd 27.02 47.46 53.91 40.77 35th Percentile 18....
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....he Act dt.30.10.2018. The Draft assessment order was passed by the TPO/- under Section 143(3) r.w.s. 144C dt.24.12.2018, with Transfer Pricing Adjustment of Rs. 171,04,84,800/- and disallowance under Section 14A of the Act of Rs. 1,37,500/-, disallowance under Section 80G of the Act of Rs. 1,12,60,750/- and disallowance under Section 40 (a)(i) of the Act for secondment of employees payment for non-deduction of TDS on Fees for Technical Services(FTS) Rs. 48,35,91,738/-.Aggrieved by the order, the assessee has filed objections in Form 35A with DRP. Whereas the DRP in the software development services segment considered the objections and directed the TPO to include comparables Cignity Technologies Limited, Sasken Communication Technologies Ltd. and no Working Capital Adjustment was granted to the assessee and the order was passed under Section 144C(5) of the Act on 27.09.2019.Subsequently,the final assessment order giving effect to the directions of DRP confirming the Transfer Pricing Adjustment to the extent of Rs. 61,43,50,100/- and disallowance under Section 14A of Rs. 1,37,500/-, deduction under Section 80G of the Act of Rs. 1,12,60,750/- and disallowance under Section 40 (a)(i) ....
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....rores with margin of 38.59%.The comparable is in business consultancy, technology engineering and outsourcing service business and market leader. It provides IP based solutions and has ownership of IP and has revenues from licensing of software products, presence of brand building, and own products. It is engaged in R & D activities and no segmental information available and further has different business model with facilities outside India and onsite activities with extra-ordinary events of acquisitions. 8. The learned Departmental Representative relied on the order for the Asst. Year 2014-15 in IT(TP)A No.3244/Bang/2018 dt.29.01.2020 in assessee case at page 22 of the Tribunal order at para 5.1.2 read as under : " 5.1.2. Larsen and Toubro Infotech Ltd This comparable was upheld by authorities below and has been objected by assessee for its inclusion. Ld.AR submitted that this company is functionally not comparable with that of assessee and is engaged in providing consultancy and testing services. Further it has been submitted that there is no segmental information available in the annual reports of this company. Ld.AR submitted that this company owns its own ....
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....Ltd. (supra), the matter was remanded to the TPO for fresh decision. Hence, we feel it proper that in the present case also, this issue should go back to the file of TPO for fresh decision after providing adequate opportunity of being heard to the assessee and while deciding the issue afresh, all the available Tribunal orders on this issue should be considered by the TPO in proper perspective." It is observed that the decision in case of CGI Information Systems Management Consultants Pvt.Ltd VS. DCIT(supra) was in respect of assessment year 2013-14. On perusal of annual report of this comparable placed at page 2012 of paper book volume 5, it is observed that during the year this company has not derived any revenue from sale of products. The only revenue earned by this comparable during the relevant year under consideration is from sale of services. It is observed at page 2022 that this company incurred overseas staff costs at Rs. 15,46,46,82,017/-, reveals that revenue earned from software services is mainly from offshore services. In the present case of assessee, there is no such expenses incurred for overseas staff costs. At page 2022 of paper book Volume 5, it is clear ....
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....ctivity as well as cost incurred on onsite software development. We notice from page 676 of assessee's PB that this company as part of its operating profit in Schedule O of profit & loss account contains expenditure for 'cost of bought out items for resale' and this is a significant part of the operating expenditure. When we see the revenue in Schedule M of the profit & loss account, there is no break-up of the revenue with regard to software services and software product. In our opinion, this distinction is enough to exclude this company from the list of comparable companies as held by the Hon'ble Delhi ITAT in the case of Saxo India Pvt. Ltd. (supra) which decision was also confirmed by the Hon'ble Delhi High Court. 39. The next company which the assessee seeks to exclude is Infosys Ltd. As far as this company is concerned, it is seen that the following are the functional dissimilarities brought to our notice:- "Functionally dissimilar - owns intellectual properties, incurs significant R&D costs & onsite activity. - Engaged in diversified business activities. - Involved in development of software products in addition to software services. - Own....
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....nation and verification of facts. (ii) Evoke Technologies Limited - has margin of 0.53%. The LdAr submitted that the company is functionally comparable and passes all the TPO's filters. The branch is a sub-set of an entity and the results of the branch are included in the audited financial statements of the entity and qualify export revenue, as the company is in the business of software development services and implement services. The LdAr has supported his arguments with the Paper Book at page no 2452 and Profit and Loss Account. Whereas the DRP has commented that unaudited accounts cannot be relied. The learned Authorized Representative relied on the decision of Nokia Seimens Networks India (P) Ltd. Vs. ACIT 70 taxmann.com 236 (Del), with observations at page 5 as under : Undisputedly the TPO has used segmental data of this comparable company relating to software development profit segment provided to him under section 133(6), which cannot be doubted without any cogent material brought on record by the assessee-company. Profit & loss account of this comparable company apparently proves the profitability of software development services segment. Segmental data ob....
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....sistently loss making unit cannot be said as comparable. In this case, the impugned order holds on facts that Capital Trust Ltd. it is not a persistent loss making unit. Therefore, Capital Trust Ltd. is comparable; and 12. We, considering the facts, circumstances and judicial decisions are of the opinion that the disputed issue in respect of losses of continuous three years has to be verified/ tested by the Assessing Officer. Accordingly we remit this matter to the file of TPO/A.O for examination. 13. The learned Authorized Representative made submissions on ground of appeal No.5.3 pertains to entering of Secondment Agreement with GS & Co. The assessee is inclined to be intervener with GS & Co. in the Special Bench formed on this disputed issue. Since the matter has not attained finality and there are no observations of DRP on this pertinent issue. Accordingly, we restore this disputed issue to the file of DRP for examination and comments and allow the ground of appeal of the assessee for statistical purpose. 14. The LdAr argued Ground of Appeal No.2.12 in connection with non-granting of Working Capital Adjustment by TPO/A.O and relied on the assessee own case for the Asse....
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....7.3. Paragraphs 13 to 16 of OECD guidelines, emphasizes need for working capital adjustment in terms of receivables and payables as under: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the Price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost ....
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....figures of receivables, inventory payable at the yearend or beginning of the year or average of these figures that should be considered;, 7.6. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with Assessee and Department should be the starting point and depending on the facts and circumstances of a case, further details can be called for. As far as Assessee is concerned, the facts and figures with regard to its business must be furnished. In so far as applying inventory, receivables and payables for computing working capital adjustment alledged by DRP/TPO in case of certain comparables, ITAT Delhi Bench in case of ITO v E Value Servc.com, reported in [2016] 75 taxmann.com 195 held that, insisting on daily balances of working capital requirements to compute working capital adjustment is not proper, as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. 7.7. It must not be forgotten that transfer pricing analysis is estimatio....
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....tential Advisor to earn exempted income, the Ao computed disallowance under Rule 8D(2)(iii) ofRs. 1,37,500 based on the disclosures in the Balance Sheet. But the assessee company has not yielded any exempted income nor dividend income in the financial year and the LdAr referred to the disclosures in the Paper Book, financial statements at page 20 Schedule 3.17,were there is no dividend nor exempted income received as per profit and loss account. Further similar disallowance was deleted in assessee own case for the Assessment Year 2014-15 as no dividend income has been earned on investments. The learned Authorized Representative relied on the decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT 378 ITR 33 (Del) where the Hon'ble High Court has held that unless and until exempted income is received for the concerned assessment year, the provisions of Section 14A of the Act are not applicable.we find the co-ordinate Bench of the Tribunal in assessee own case in IT(TP)A No.3244/Bang/2018 for the Assessment Year 2014-15 has dealt at pages 46 & 47 para 8 of the order as under : " 8. Ground No. 4 raised by assessee is in respect of disallowance made....
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.... a direct contribution to the Government. No other inferences were raised by the TPO/A.O. in respect of other donations which are equally eligible for deduction under Section 80G of the Act. The learned Authorized Representative submitted that the donations or expenditure has been incurred wholly and exclusively for the purpose of business and eligible for deduction under Section 37 of the Act and alternatively under Section 80G of the Act. We found the DRP has dealt at page 81 of the order and observed that, the claims are in the nature of CSR Policy expenditure and hence does not qualify for deduction under Section 80G of the Act. The learned Authorized Representative demonstrated in Paper Book Vol.II at pages 882 & 883 the list of deductions claimed under Section 80G of the Act with a statement of donees along with PAN and address and donation receipts. Further the donation receipts are selfexplanatory and are eligible for deduction under Section 80G of the Act. We find that the CSR expenses are required to be incurred by companies as per Section 135 of the Companies Act and the deduction u/s. 37(1) of the Act, is not available from Assessment Year 2015-16 as per the Explanation....