TaxTMI 
TaxTMI 
TaxTMI 
2021 (5) TMI 864
X X X X Extracts X X X X
X X X X Extracts X X X X
....from its associated enterprises; and b) Disallowance of Rs. 10,90,21,322 under section 37(1) of the Act on account of license fee and data service management charges paid to GE Capital Corporation, USA for use of 'Vision Plus' software by erroneously treating the same as capital expenditure. 2. Adjustment on account of Transfer Pricing Addition The Ld. TPO/AO/DRP erred in enhancing the income of the Appellant by Rs. 4,85,54,206 by holding that the international related party transactions relating to payment for data server management charges and other transactions, aggregated being inextricably linked to the provision of information technology enabled support services (ITES), do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in: 2.1 not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 2.2. disregarding the Arm's Length Price ('ALP') determined by the Appellant in the Transfer Pricing ('TP') documentation maintained by it as per section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules'); 2.3. dis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ets employed and risks assumed for benchmarking the international transaction entered by the Appellant 2.10. rejecting certain companies and adding certain companies to the final set of comparables for the impugned transaction on an ad-hoc basis. The Ld. TPO has resorted to cherry picking of comparables to determine ALP for the impugned transaction; 2.11. rejecting the additional comparables introduced by the assessee without any cogent reasons; 2.12. committing errors in the computation of the operating profit margin of certain companies considered as comparable; 2.13. While calculating impugned adjustment, ld. TPO/A.O./DRP erred in: 2.13.1. incorrectly computing actual price received by not considering Rs. 28.755.543 i.e. revenue accounted for during FY 2012-13 which actually pertains to FY 2011-12; 2.13.2. computing adjustment on transactions with Computer Science Corporation which is an unrelated entity, and which has been disclosed on abundant caution basis. 3. Disallowance of license fee and data service management charges paid to GE Capital Corporation. USA ('GECC')-Rs. 10,90,21,322 3.1. That on the facts and circumstances of the case and in law, the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... provisions of section 144C(13) of the Act, neither followed the directions received from the Hon'ble DRP nor provided any evidence The Hon'ble DRP had directed the Learned AO to provide relief to the Appellant upon confirmation that the Revenue has accepted the decision of the Hon'ble Tribunal for AY 2007-08 and AY 2008-09 and has not agitated the order further. 3.8. That on the facts and circumstances of the case and in law, the Learned AO has erred in facts by making incorrect factual observations with respect to the End User License Agreement entered into between the Appellant and GECC, which are absolutely contrary to the contents of the agreement. 3.9. Without prejudice to the above, the Learned Assessing Officer 3.9.1. erred in facts and in law in disallowing the entire amount without regarding the fact that the said sum was already disallowed by the Appellant under section 40(a)(i) of the Act while computing its total income as per the return of income, leading to double taxation of the self-same amount. 3.9.2. erred in not allowing depreciation @ 60% on the above payments applicable to computer software in accordance with the provisions of section 32 of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to services mentioned at S. No. 2. There has been no Transfer Pricing dispute in the preceding years. For purposes of benchmarking the transaction of ITeS Services, the assessee used three-year weighted average of 7 comparables and the OP/TC was calculated at 4.91% (working capital adjusted margin was 0.95%) while the OP/TC of the assessee was 2.95%. The transactions were considered to be at arm's length on the basis of permissible range of 5%. The TPO vide order dated January 21, 2016 rejected the comparability analysis in respect to transaction of ITeS Services and conducted a fresh benchmarking study on the basis of additional/modified quantitative filters. The TPO arrived at a final list of 10 comparables out of which 3 comparables were chosen by the assessee and fresh 7 comparables were introduced by the TPO. Further, the TPO rejected the working capital and risk adjustment and recalculated the margin of the assessee. A summary of the transfer pricing adjustment carried out by the TPO is as follows: Transaction No. of comparables Arm's Length Margin Margin of the assessee Quantum of Addition (In INR) Transaction of ITes Services 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... HC) * Pr. CIT v evalueserve (SEZ) Gurgaon Pvt. Ltd: [Delhi High Court in ITA No. 241/2018, Order dated February 26, 2018] * Pr. CIT v H&S Software Development and Knowledge Management Centre Pvt. Ltd: [Delhi High Court in ITA No. 912/2017, Order dated January 3, 2018] * Timex Group India Ltd. vs. DCIT: [2019] 102 taxmann.com 459(Del I TAT * Inductis India Pvt. Ltd. Vs. ACIT (2019) 101 taxmann.com 110 (Del ITAT) 5.2. The Ld. DR relied upon the order of the TPO/AO and the DRP. 5.3. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the functions of Eclerx Services Limited are different than the functions of the assessee company. Besides this, significant expenditure on Advertising and marketing expenses were made by this comparable company and there is significant intangible assets owned by this company. There is no segmental details available of this company. All these factors determine that Eclerx Services Limited is not a good comparable. Therefore, we direct the TPO to exclude this comparable from the final set of comparables. 5.4. TCS-e-Serve Limited: The Ld. AR submitted that this comparable company....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is comparable company is functionally different and has diversified business which comprises customer service outsourcing, finance and accounting, human resources outsourcing, legal process outsourcing, sales and fulfillment, sourcing and procurement outsourcing etc. Infosys BPO is engaged in the providing high-end integrated services by assisting its clients in improving their competitive positioning by managing their business processes in addition to providing increased value. The brand value of Infosys BPO Ltd. enjoys the benefit of brand value of "Infosys", one of world's leading companies. It has consistently spent substantial amount of money on brand building. There was an extraordinary financial events during Financial Year 2011-12 as it acquired 100% voting rights in Portland Group Pty. Limited (strategic sourcing & category management services provider based in Sydney, Australia) and also invested in Mc Camish Systems LLC. The Ld. AR relied upon the following decisions: * Pr. CIT v Actis Global Services Pvt. Ltd.: [Delhi High Court in ITA No. 417/2016, Order dated August 5, 2016] * Pr. CIT v. evalueserve (SEZ) Gurgaon Pvt. Ltd: [Delhi High Court in ITA No. 241/2018....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t and thus the financial information relating to the three segments is not reliable. The Ld. AR relied upon the following decisions: * Timex Group India Ltd. vs. DCIT: [2019] 102 taxmann.com 459(Del ITAT) * Inductis India Pvt. Ltd. v. ACIT: [2019] 101 taxmann.com 110(Del ITAT). 5.11. The Ld. DR relied upon the order of the TPO/AO and the order of the DRP. 5.12. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that Acropetal Technologies Ltd. (Healthcare Segment) is functionally different as the Healthcare Segment has been taken into account. The company is engaged in software development. It provides healthcare services which includes innovation, patient life cycle management, physician and clinical life cycle management, hospital administration management, drug discovery and disease life cycle management. There is significant AMP expenses. Acropetal acquired two US based companies subsequent to which it will get into IP development by exploring the expertise and design skills available in the Silicon Valley. It has un-allocable expenditure. All these factors determine that Acropetal Technologies Ltd. is not a g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....taining to a comparable having a financial year ending other than end-March can be reasonably extrapolated and used. Therefore, we direct the TPO/AO to verify this comparable and its functions as well as the principle laid down in the decision of the Hon'ble Delhi High Court and if found suitable, this comparable be included in the final list of the comparables. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. 6. Thus, Ground No. 2.1 to 2.12 are partly allowed for statistical purpose. 7. As regards to Ground No. 2.13.1 relating to incorrect computation of assessee's margin, the Ld. AR submitted that the TPO while computing the adjustment has wrongly considered the operating revenue of the assessee to be Rs. 1,83,11,04,381 instead of Rs. 1,85,87,78,312/-. The TPO while calculating the operating revenue did not consider the amount of Rs. 2,87,55,643/-. The TPO and the DRP completely disregarded the submissions made by the assessee in this regard. The Ld. AR submitted that the assessee (previously known as GE Capital Business Process Management Services Private Limited) rendered services worth Rs. 2,87,55,643/- to SBI ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt of services rendered to SBI despite having incurred a cost of Rs. 3.2 crore. These facts were totally ignored by the TPO/AO and therefore, in the interest of justice, we deem it proper to remand back this issue to the file of the TPO/AO for proper verification and adjudication as per the facts and law. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Hence, Ground No. 2.13.1 is partly allowed for statistical purpose. 10. As regards to Ground No. 2.13.2 relating to incorrect calculation of Proportionate Adjustment by the TPO, the Ld. AR submitted that the total related party transactions for the transaction of ITes Services, as per the TP Study, is Rs. 24,01,26,768/- which also includes Rs. 12,92,90,597/- which was paid by the Assessee to CSC Australia Pty Ltd. ("CSC Australia"), a third party for the receipt of data processing and related services pursuant to a Master Technology Services Agreement between GE Capital Corporation USA ("GECC") and Computer Sciences Corporation ("CSC USA") and was reported as an international transaction only out of abundant caution. Therefore, the related party transaction or AE transactions....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ciences Corporation, USA as per the contentions of the Ld. AR. The Ld. AR's submission during the hearing was that this transaction was reported as an international transaction only out of abundant caution. But, the related party transaction or AE transactions amounts to only Rs. 11,08,36,171/-. After perusal of the records, these facts have to be verified by the TPO/AO which was not done by the Revenue authorities. It appears that the Computer Sciences Corporation, USA and CSC Australia Pty Ltd., both are not associated enterprises of the assessee as set out by the provisions under Section 92A(1) or 92A(2) of the Income Tax Act, 1961. But the TPO ignored these facts and while computing the proportionate adjustment has considered the operating expenses for related party transaction as Rs. 24.01 crores, thereby, calculating the proportionate factor as 13.34%. Therefore, we remand back this issue to the file of the TPO/AO and after verifying the transactions between Computer Sciences Corporation, USA and CSC Australia Pty Ltd., the same should be taken cognizance as per the facts and provisions of Income Tax Act, 1961. Needless to say, the assessee be given opportunity of hearing....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ied upon the order of the TPO/AO and the DRP. 16. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that this issue is covered by the order of the Tribunal in assessee's own case and there is no appeal filed by the Revenue before the Hon'ble High Court. The Tribunal in A.Y. 2007-08, 2008-09, 2010-11 and 2011-12 held as under: "7. We have considered the rival submissions, perused the orders of the authorizes below, material available on record and gone through the case laws cited by both the parties. From the above narration of facts, we find that the arguments advanced by both the parties rest on the vital question whether under the facts and circumstances of the case, the payment of license fee, connectivity charges and co-ordination charges amounting to Rs. 2,19,60,467/- made by the assessee to GECC(USA) under the end-user agreement shall fall within the category of capital expenditure or revenue expenditure? The stand of the assessee is that it is in the nature of revenue expenditure and deductible u/s. 37(1) of the Act whereas the ld. Authorities below have put it in the category of capital expenditure a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d terminated forthwith. Under clause 5.5, the assessee is required to deliver the licensed program back immediately to GECC(USA) after removing the same from its systems on termination of agreement. Clause 5.5 of the agreement reads as under: "5.5 Upon termination of this Agreement the right to use the Licensed Program shall end and GECBPMS shall, with immediate effect: (a) deliver to GECC the Licensed Program; and (b) purge all copies of the licensed program stored in any CPU or other storage medium or facility, which for any reason cannot be delivered to GECC. In addition, an officer of GECBPMS shall certify in writing to GECC that all proprietary material relating to the Licensed Program has been delivered to GECC or purged and that the use of the Licensed Program and any portion thereof has been discontinued." Under clause 3.1, the license agreement allows GECC to receive license fee from assessee on quarterly basis as mutually agreed upon. The agreement provides for periodic payment for use of software to GECC, which is subject matter of renewal and revision every calendar year. No case is made out by the department to assume that the periodic payment made by the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion software is Rs. 2.19 crores which is 1.43%. This shows that implies that this software only is not the soul of assessee's business as argued by the ld. DR. In the case of southern Switchgear Ltd. (supra), the technical knowledge and information remained with the assessee even after termination of agreement which constituted enduring benefit to the assessee whereas in the present case, the software in question is an application software and after termination of license agreement, said software was to be delivered back to the licensor and the same cannot be made to use by the assessee in any manner. Similarly in the case of Jones Woodhead and Sons (India) (supra) relied on by the Assessing Officer is also distinguishable on facts inasmuch as in that case the agreement between the assessee and the foreign collaborator was in relation to setting up of a new business and the foreign collaborator besides furnishing information and technical know-how, rendered valuable assistance in setting up of the factory itself. No such situation arises in the present case. In view of this discussion and relying on various decisions cited by assessee, we are of the considered opinion that the ....