TaxTMI 
TaxTMI 
2020 (1) TMI 1433
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....Appellant, is bad in law and liable to be quashed. Transfer Pricing Related 2. That the learned AO and the learned DRP erred in upholding the rejection by the learned Transfer Pricing Officer ("the learned TPO") of the analysis undertaken by the Appellant in its Transfer Pricing ("TP") documentation, and thereby erred in not appreciating that the Appellant had prepared the TP documentation with bona fide and in good faith. 3. The learned AO and the learned DRP erred in law and on facts in disregarding application of multiple year / prior year data as used by the Appellant in the TP documentation and holding that only current year (i.e. financial year 2010- 11 relevant to assessment year 2011-12) data for comparable companies should be used. 4. The learned AO and the learned DRP erred on facts and in law in upholding the acts of the learned TPO: (a) in conducting a fresh benchmarking analysis using non-contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis based on his own conjectures and assumptions. (b) in rejecting the comparability analysis of the Appellant in the TP docum....
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....the company while filing its Income-tax return. 13. Consequently, the learned AO erred in charging interest under section 234B of the Act. 14. Consequently, the learned AO erred in charging interest under section 234C of the Act. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal." ITA (TP) A No. 505/B/2016 (revenue's appeal) "1. On the issue of excess claim u/s 10A and 10AA, whether the DRP was right in relying on the decision of the Hon'ble High Court of Karnataka in the case of Tata Elxsi & Others v. CIT (349 ITR 98) and in allowing the claim in favour of the assessee and against the Revenue. The decision is not accepted in principle but due to low tax effect, further appeal is suggested. 2. On the issue of disallowance of software expenses whether the DRP was right in relying upon the decision of the Hon'ble ITAT in assessee's own case for A.Y. 2008-09 and in allowing the appeal. AO has not accepted the decision. 3. Whether ld.DRP has erred in granting 1% risk adjustment arbitrar....
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.... technology related products and services. Assessee filed its return of income for year under consideration declaring total income of Rs. 52,22,33,025/-. The return was processed under section 143 (1) of the Act, and was selected for scrutiny. Consequentially, notices under section 143 (2), 142 (1) along with questionnaire was issued to assessee. In response to statutory notices, representative of assessee appeared before Ld.AO and filed requisite details as called for. 2.1. From details filed by assessee, Ld.AO observed that assessee has entered into international transaction with its associated enterprise that exceeds Rs. 15 crores. Accordingly, case was referred to transfer pricing officer to determine arm's length price under section 92CA of the Act. Upon receipt of reference, Ld.TPO called for economic details in respect of international transaction entered into by assessee. Ld.TPO observed that assessee had following international transactions with its associated enterprises: Particulars Amount in Rs. Provision of services, SWD 3,86,63,46,033/- Provision of services, ITES 1,17,69,82,795/- Management fees paid 19,44,47,584/- Reimbursement of ex....
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....nt and a set of 10 comparables for ITES segment with an average margin of 24.82% and 24.77% respectively: Comparables selected by learnt TPO for SWD segment S.No. Comparables selected Margin 1. Acropetal Technologies Ltd (SEG) 31.98% 2. eZest Solutions 21.03% 3. E Infochips Ltd 56.44% 4. Evoke 8.11% 5. ICRA Techno Analytics Ltd 24.83% 6. Infosys Ltd 43.39% 7. Larsen and Toubro Infotech Ltd 19.83% 8. Mindtree Ltd 10.66% 9. Persistent Systems and Solutions Ltd 22.12% 10. Persistent Systems Ltd 22.84% 11. RS Software (India) Ltd 16.37% 12. Sask and Communications Technologies Ltd 24.13% 13. Tata Elxsi Ltd (SEG) 20.91% Average Margin 2 4.82% Comparables selected by Ld.TPO under ITES Segment S.No. Comparables selected Margin 1. Accentia Technologies Ltd 28.89% 2. Acropetal Technologies 26.86% 3. Cosmic Global Ltd 9.81% 4. e4e Healthcare 12.38% 5. ICRA Online Ltd (SEG) 34.1% 6. Jeevan Scientific Technologies Ltd 70.66% 7. Infosys BPO Ltd 17.89% 8. ....
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....49,46,06,672/-. Aggrieved by impugned order passed by Ld.AO, assessee, as well as revenue, is in appeal before us. Assessee has also filed cross objection against the additional ground raised by revenue subsequently. 2.6. Revenue in their appeal raised following Revised Additional ground vide Application dated 20.11.2018 in respect of rejecting comparables on the basis of high turnover by DRP: "Revised Additional grounds: 1. Hon'ble DRP erred in directing AO/TPO to exclude the software development companies whose turnover is below 200 crores and DRP further erred in directing the AO/TPO to exclude IT enabled services companies whose turnover is more than 200 crores whereas in case of Chriscapital Investment Advisory (India) Pvt.Ltd vs DCIT, 56 Taxmann.com 417 (2015) (12) it was held that turnover cannot be the sole criteria to reject comparables." 2.6.1. Ld.CIT DR submitted that the issue arises from the records and there is no need to consider any fresh evidences for adjudicating the additional ground raised. Ld.CIT DR submitted that DRP erred in directing exclusion of companies whose turnover is more than 200 crores in respect of segments under consider....
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....re solutions Ltd ITES segment Comparables sought for exclusion • Accentia technologies Ltd • Acropetal Technologies Ltd • ICRA Online Ltd • Jeevan Scientific Technology Ltd 3.1. Before we undertake comparability analysis, it is sine qua non to understand functions performed, assets owned and risks assumed by assessee under both these segments. Transfer pricing study shows that assessee provides software development services and IT enabled services as a captive service provider. It has been recorded that assessee undertakes software development and sales as an enterprise providing services to the third-party customer located domestically. It has been submitted in TP study that operations of assessee can be broken down under 2 categories viz; export and domestic service segment. Under the export services development Centre performs contract software development for the group companies on several financial software products and is compensated on a cost plus markup basis. The group company has the required infrastructure with skilled resources in all areas of project management and development, resources with specialised s....
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....bove, assessee owns routine assets like plant and machinery, computer, office equipments, furniture fixtures, motor vehicles etc. It has also been recorded that assessee does not own any intellectual property arising from the development activity. 3.1.4.Risks assumed: It has been recorded that this activities carried out at a minimal risk to assessee. 3.1.5. Characterisation: In TP study, based on above FAR, assessee is characterised as a captive, contract service provider in respect of SWD and ITES service segment with assuming less than normal risk associated with carrying out such services and enterprise in respect of software development and sales activity wherein certain risk is associated with activity. 3.2. Based upon above FAR analysis, we shall consider the comparables alleged for inclusion/exclusion by assessee under both segments. Software development service segment (SWD) Comparable sought for exclusion: Persistent Systems and Solutions Ltd This comparable has been included by Ld.TPO though it has been objected by assessee on functional dissimilarities. It has been submitted that segmental information is in respect of this company is not avail....
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....f records placed before. At page 1304 of the annual report placed in Volume 1 of Index to Annual Reports it is observed that segmental details has been provided. All details relevant for computing the margin of this comparable are available at page 1304-1305 of paper book. We are therefore unable to appreciate arguments advanced by Ld.AR regarding segmental details not available. Further it is observed that Ld.TPO considered the consolidated figure appearing in profit and loss account, instead of considering segmental profits from software services of this company. We therefore set aside this comparable to Ld.AO/TPO to verify relevant observations recorded herein above and to recompute margins of this comparable. Accordingly this comparable is set aside to learnt AO/TPO. 3.2.1. Comparables sought for inclusion: LGS global Ltd & FCS software solutions Ltd Assessee is seeking inclusion of these comparable. It has been submitted that LGS Global Ltd., was submitted as an addition to original list of comparables during TP assessment. Ld.AR submitted that Ld.TPO rejected this company on the ground that annual report did not give breakup of employee cost. As regards F....
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.... coordinate bench of this Tribunal in case of Swiss Re Shared services (India) Pvt.Ltd vs ACIT reported in (2016) 76 Taxmann.com 22. On the contrary, Ld. CIT DR placed reliance upon the orders of authorities below. We have perused submissions advanced by both sides in light of records placed before us it is observed that though this company was into medical transcription and other services. It can neither be held to be a high-end activity, nor can be held to be low-end services. However it is observed that this company had undergone acquisition, which is an extraordinary event and can impact profits for year under consideration. Under such circumstances we are of the opinion that this company cannot be considered to be comparable with that of assessee for the year under consideration. Accordingly direct this company to be deleted from the finalist. ICRA Online Ltd Assessee objected for inclusion of this comparable. Ld.AR submitted that this company is functionally not comparable under this segment as it is providing high-end KPO services, whereas assessee is carrying out back office services. He also submitted that this company fails RPT filter applied by Ld.TPO. ....
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....lation to same issue they are taken up together. Ld.AR also submitted that upholding working capital adjustment being restricted at 1.63% is against view taken by various decisions of this Tribunal. He submitted that Ld.TPO is duty bound to give adjustment based on difference in economic, geographical condition, compared with that of assessee in actual is without any. He placed reliance on various decisions of coordinate bench of this Tribunal where, Ld.TPO is directed to provide working capital adjustment by taking actual data, without putting any upper limit. 3.4.1. Ld.CIT DR submitted that DRP provided risk adjustment at 1% on ad hoc basis without having a scientific approach. She submitted that there are various factors that needs to be considered for providing risk adjustment which assessee has to establish in its case having regards to comparables finally selected. She placed reliance upon VM global Technology Services (India) Pvt.Ltd vs ACIT reported in (2018) 91 taxman.com 403 in support of her contention. We have perused submissions advanced by both sides in light of records placed before us. 3.4.2.We have perused orders passed by authorities below on the basis of....
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.... receivables arising out of such transaction have already been accounted for. Alternatively, he submitted that working capital subsumes sundry creditors and therefore separate addition is not called for. 3.5.1. Ld.TPO computed interest on outstanding receivables at the rate equal to 13.46 % on the receivables that exceeded 6 months. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. 3.5.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare Pvt.Ltd vs. ACIT reported in (2015) 62 Taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. (2017) 398 ITR 66 (Del), held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6 which subsequently upheld by Hon'able Delhi High Court vide order dated 21/07/16 in ITA No. 379/2016, also upheld by Hon'b....
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....terest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case noted a decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.), which dealt with question of law: (c) `Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?' 3.5.6. She submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-char....
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....e Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions." 3.5.8. In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Assessing Officer/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly these ground raised by assessee stands allowed for statistical purposes. 3.6.Ground No. 12 is against non-grant....
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....m as expenditure under section 37 of the Act. 5.1. Ld. CIT DR placed reliance upon orders of authorities below. 5.2. We have perused submissions advanced by both sides in light of records placed before us. It is observed that DRP directed Ld.AO to grant the deduction claimed by assessee as revenue, however Ld.AO failed to follow the directions. It is observed that DRP following the view taken by this Tribunal in preceding years in assessee's own case held the expenditure to be allowable in the hands of assessee. It has been submitted by Ld.AR that this view is supported by another decision of coordinate benches of this Tribunal in case of IBM India Pvt.Ltd. vs CIT reported in (2007) 290 ITR (AT) 183 (Bang) and Amway India Enterprises vs DCIT reported in (2008) 301 ITR (AT) 1 (Del). Respectfully following the same, we direct Ld.AO to grant deduction claimed by assessee under section 37 of the Act. Accordingly, this ground raised by revenue stands dismissed. 6. Ground No. 4-5 (revenue appeal), additional ground raised by revenue and CO filed by assessee. Revenue by way of additional ground challenges exclusion of comparables merely on turnover filter without a....
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.... 6.4. On the contrary Ld.AR placed reliance upon decision of coordinate bench of this Tribunal in case of Genesis Integrating Systems India (P) Ltd vs DCIT reported in (2012) 20 taxman.com 715. He submitted that this Tribunal in case of Autodesk India (P) Ltd vs DCIT reported in (2018) 96 Taxmann.com 263 (Bang) expressed a view that turnover is a relevant criteria for determining comparability of comparable entity and the tested party. He also relied upon decision of Hon'able Karnataka High Court in case of Acuses software India (P) Ltd vs ITU reported in submitted by (2018) 98 Taxmann.com 183, wherein applicability of turnover filter has been upheld. 6.5. We have perused submissions advanced by both sides in light of records placed before us. It is observed that companies engaged in software development services are treated by both sides as comparables irrespective of various verticals of software. Ld.TPO as well as assessee searched for comparables, which are engaged in software development services, but has not consider verticals/functional or service lines, in which the company is engaged. Thus it is observed that comparables selected are into different verticals and fu....
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.... received from AE. Engineers employed by assessee designs functional specifications for the project identification of interfaces components coding and bug fixing. Ultimate approval and owner of project developed is the AE. In our view, by involving itself in process of Software development for AE, assessee cannot be held to be fulfledged Software Development Company. One has to look into transaction in regards to services rendered and FAR, which catagorises it to be a captive service provider, working on business model of cost plus margin. 6.7. It is observed that comparables sought to be excluded are 100 % Software Development Companies, having high turnover and therefore respectfully following aforestated view in case of Genesis Integrating Systems India Pvt. Ltd., vs DCIT (supra) these comparables are to be excluded on both the counts of functionally not being similar with that of assessee and also because they have a high turnover. It is submitted that subsequently this Tribunal in case of Yodlee Infotech Pvt. Ltd vs ITO in IT(TP)A no. 108/Bang/2014 For assessment year 2009-10, vide order dated 12/12/14, excluded these companies following Genesis Integrating systems Indi Pvt....
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....i ITAT in the case of Baxter India Pvt. Ltd. Vs. ACIT ITA No.6158/Del/2016 for AY 2012-13 in the case of a company rendering ITES such as the Assessee, vide order dated 24.8.2017 Paragraph 23 held that Infosys BPO is not comparable with a company rendering ITES for the following reasons:- "23. In so far as exclusion of Infosys BPO Ltd. is concerned, we find from the submissions made by the assessee before the Assessing Officer/TPO/DRP is that Infosys BPO Ltd. is predominantly into areas like Insurance, Banking, Financial Services, Manufacturing and Telecom which are in the niche areas, unlike the assessee. Further it was also submitted that the Infosys BPQ Ltd. comprises brand value which will tend to influence its business operation and the pricing policy thereby directly impacting the margins earned by the Infosys BPO Ltd.. We find the submissions of the ld. counsel for the assessee before TPO/DRP that in order to maintain the brand image of Infosys BPQ Ltd. in the market, the company incurs substantial selling and marketing expenditure whereas the assessee being a contract service provider does not incur such expenses to maintain its brand has not been controverted by t....