TaxTMI 
TaxTMI 
2022 (7) TMI 489
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.... is also engaged in trading of the infotainment systems, where the assessee purchases professional loudspeakers, audio special effect equipment, audio mixing consolers, consumer electronics and microphones and headphones from its Associate Enterprises (AEs) to be sold to domestic third-party customers. 3. During the previous year relevant to Assessment Year 2014-15, the assessee, inter alia, provided SWD services to its AEs for a consideration of Rs. 102,38,70,343/- and earned a net cost-plus mark-up of 19.64%. The assessee also purchased goods from its AEs for a consideration of Rs. 64,41,74,821/- for trading segment. In the trading segment, the assessee earned a gross profit margin of Rs. 24.94%. 4. On a reference made by the Assessing Officer ('AO') to the TPO, the TPO passed an order dated 31.10.2017 under Section 92CA of the Income-tax Act, 1961 ('the Act') determining a TP adjustment of Rs. 8,34,81,655/- in respect of the SWD services segment and Rs. 11,36,10,183/- in the trading segment, aggregating to total TP adjustment of Rs. 19,70,91,838/-. 5. Initially, a draft assessment order dated 15.12.2017 came to be passed by the AO in which, inter alia, t....
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....ogies Ltd. 27.62 7 SQS India Ltd. 22.37 8 Thirdware Solution Ltd. 44.68 Arithmetic mean 29.40 Computation of arm's length price by the TPO and the adjustment made: Arm's length mean Mark-up 29.40% Operating Cost Rs. 85,57,58,886/- Arm's Length Price @129.40% of cost Rs.1,10,73,51,998/- Price Received Rs.1,02,38,70,343/- Shortfall being adjustment u/s. 92CA of the Act Rs.8,34,81,655/- 11. The addition of Rs. 8,34,81,655/- suggested by the TPO as short fall in the ALP was added to the total income by the AO in the Draft Order of Assessment. The assessee filed objections before the Dispute Resolution Panel (DRP) against the Draft Order of Assessment under section 144C of the Act. 12. The DRP issued the following directions to the TPO: The following companies were directed by the DRP to be excluded from the list of comparables by accepting the contentions of the assessee: (i) Cigniti Technologies Ltd.; and (ii) SQS India Ltd. 13. The DRP, on holding that Sagarsoft India Ltd. is functionally comparable to the assessee, directed the TPO to verify if the company passes other filters a....
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...., which goes to help the company have a premium pricing for its services. The company also heavily focuses on research and development activity and incurs significant expenditure for this account. Further, the company operates in diversified markets. Thus, the services rendered by the company are not functionally comparable to the routine SWD services rendered by the assessee. 16. We find that it is submitted that this company is consistently excluded from the final list of comparables in cases of other assessees who are placed similar to the assessee. Reliance in this regard is placed on the decisions of this Hon'ble Tribunal in the cases of LG Soft India Pvt. Ltd. v. DCIT (Order dated 28.05.2019 passed by this Hon'ble Tribunal in IT(TP)A No. 3122/Bang/2018 for the assessment year 2014-15), EMC Software and Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019 passed in IT(TP)A No. 3375/Bang/2018) and Brocade Communications Systems Pvt. Ltd. v. DCIT (Order dated 19.02.2020 passed by this Hon'ble Tribunal in IT(TP)A No. 79/Bang/2019), wherein in the cases of the assessee which is similar to the assessee, the company was directed to be excluded from the final set o....
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....imilar to the assessee, the company was directed to be excluded. We therefore direct that this company should be excluded from the final list of comparables. (c) Persistent Systems Ltd. ('Persistent')- As far as exclusion of this company as a comparable company is concerned, it is submitted that this company is functionally dissimilar as it is engaged in rendering IT services and in the development of software products without there being separate segmental information disclosed in its Annual Report for such activities. In the absence of segmental data being made available as regards the IT services and products offered by it, it is not possible to determine whether the company passes the filters applied by the TPO. The operations of the company predominantly relate to providing software products, services and technology innovation covering full life cycle of product to its customers, which is completely different from the services rendered by the assessee. The company also made significant investment in intellectual property led solutions and also had a dedicated team for research and Intellectual Property ('IP') developments. The company also owns several IP....
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....consistently excluded from the final list of comparables in cases of assessees placed similar to that of the assessee. Reliance in this regard is placed on the decisions of this Hon'ble Tribunal in the cases of LG Soft India Pvt. Ltd. v. DCIT (Order dated 28.05.2019 passed by this Hon'ble Tribunal in IT(TP)A No. 3122/Bang/2018 for the assessment year 2014-15), EMC Software and Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019 passed in IT(TP)A No. 3375/Bang/2018) and Brocade Communications Systems Pvt. Ltd. v. DCIT (Order dated 19.02.2020 passed by this Hon'ble Tribunal in IT(TP)A No. 79/Bang/2019), wherein in the cases of assessee which is placed similar to the assessee, the company was directed to be excluded. Therefore, this company is directed to be excluded from the final list of comparables. 20. Ground Nos. 1(l), and (n) in the appeal: Vide these grounds, the assessee is seeking inclusion of Akshay Software Technologies Ltd., and Maveric Systems Ltd. (a) Akshay Software Technologies Ltd. ('Akshay'): This company was selected by the assessee as a comparable company in its TP study but came to be rejected by the TPO for the reason that the....
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....ar as exclusion of this company is concerned, the TPO without any specific reason being assigned did not include this company as a comparable company. The DRP rejected the contention of the assessee seeking its inclusion on the basis that generally, companies with R&D expenditure of less than 3% alone were considered. In this regard, it is submitted that the action of the DRP is wholly erroneous in as much as the TPO did not apply a filter to exclude companies incurring R&D expenses. In the absence of application of a filter, rejecting a company on an arbitrary basis, more so when it is otherwise functionally comparable, is erroneous. Therefore, this company ought to be included in the final list of comparables. 24. We find that this Tribunal in the cases of EMC Software and Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019 passed in IT(TP)A No. 3375/Bang/2018) and Brocade Communications Systems Pvt. Ltd. v. DCIT (Order dated 19.02.2020 passed by this Hon'ble Tribunal in IT(TP)A No. 79/Bang/2019), wherein in the case of an assessee which is placed similar to the assessee, the company was remanded to the TPO. We therefore remand the question of comparability of this co....
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.... Arithmetic mean 14.04 Since the profit margin of the assessee was higher than that of the comparable companies, the assessee claimed that the price received from the AE should be regarded as at Arm's Length. 29. The TPO did not accept assessee's choice of MAM and he chose TNMM as MAM for the reason that data for comparability under RPM required many details that may not be available in public domain. Apart from the above, the TPO also held that the assessee performs more functions than a normal distributor and therefore RPM is not MAM. The TPO thereafter chose the following comparable companies under TNMM. Sl. No. Name of the Company OP/Sales (in %) 1 Hi-Tech Systems & Services Ltd. 22.75 2 Sagittarians International Ltd. 9.73 3 Yamato Scale India Pvt. Ltd. 14.50 4 Shiv Pad Engineers Pvt. Ltd. 12.89 5 Adtech Systems Ltd. 11.82 6 Airox Technologies Pvt. Ltd. 12.57 7 Ankit Air Systems Pvt. Ltd. 11.28 8 United Telelinks (Bangalore) Pvt. Ltd. 9.30 9 Asian Feb Tec Ltd. 10.35 10 Intec Infonet Pvt. Ltd. 8.61 11 B N A Technology Consulting Ltd. 9.19 ....
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.... Ltd. (Ground No. 2(g)); (vii) Ankit Air Systems Pvt. Ltd. (Ground No. 2(h)); (viii) Asian Feb Tec Ltd. (Ground No. 2(i)); (ix) B N A Technology Consulting Ltd. (Ground No. 2(j)); (x) Keith Electronics Pvt. Ltd. (Ground No. 2(k)); (xi) Usart Technologies India Pvt. Ltd. (Ground No. 2(l)); and (xii) I B D Electronics Pvt. Ltd. (Ground No. 2(m)) (iv) That the lower authorities erred in not including: (i) Redington (India) Ltd. (Ground No. 2(n)); and (ii) Salora International Ltd. (Ground No. 2(o)) (v) The lower authorities erred in determining the TP adjustment on the entire trading segment including transactions undertaken with unrelated enterprises (Ground No. 2(p)). 34. We shall take up for consideration ground No. 2(a) in the appeal re. characterization and Ground No. 7 re. application of MAM. In this regard, we find the following are the functions performed, assets employed and risks assumed by the assessee (as available in the TP study at page 586 of the paperbook): (a) Functions performed: During the year, the assessee carried on trading activities for its Professional and Lif....
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....ts sold. (b) Risks assumed: Contract Risk: In respect of the sales made to third party customers, the assessee enters into contracts with third-party customers and hence, bears the contract risk, However, in relation to import of traded goods from its AEs, the assessee does not bear any contract risk. Market Risk: The products imported by the assessee are sold to third party customers in India and thus, it would bear normal market risks associated with the trading of cables in the domestic market. Price Risk: The assessee bears the price risk in relation to sale of goods to third-party customers. The AEs are not exposed to this risk. Foreign Exchange Risk: The assessee is invoiced in foreign currency for import of finished goods. The assessee bears the foreign exchange fluctuation risk in respect of import of finished goods due to fluctuation in the foreign exchange currency rates. Inventory Risk: The assessee bears inventory risk in relation to the products imported from AEs. Credit Risk: The assessee bears the credit risk in respect of its sales to third party customers as it enters into contracts in its own name. The....
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....tional Services (P.) Ltd. ( [2018] 90 taxmann.com 54 (Delhi) at para 12); (vi) Horiba India (P.) Ltd. v. DCIT ( [2017] 81 taxmann.com 209 (Delhi - Trib.) at para 12) 38. Further, reliance is placed on the decision of the Hon'ble Mumbai Bench of the Tribunal in the case of Bristol Myers Squibb India Private Limited v. DCIT (Order dated 28.08.2019 passed in ITA No. 1969/Mum/2014), wherein it was held that, "Thus, if the ALP of a transaction can be determined by applying any of the direct methods like CUP, RPM, CPM then they should be given a preference, and it is only where the said traditional methods have been rendered inapplicable that under such circumstances TNMM should be resorted to". 39. The TPO's conclusion that complete information as regards comparable distribution is unavailable in public domain is also baseless and all information required for application of RPM is available in the public domain. Therefore, we hold that the assessee is a mere distributor and the method applied by it ought to be adopted. Pertinently, in the assessee's own case for assessment years 2015-16 and 2016-17, the TPO accepted the method applied by the assessee in the tr....
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..... i-Flex Solutions Ltd. ([2010] 42 SOT 7 (MUM.)(URO)), which came to be affirmed by the Hon'ble High Court of Bombay in CIT v. i-Flex Solutions Ltd. ( [2014] 46 taxmann.com 88 (Bombay)); and - ACIT v. Zydus Infrastructure (P.) Ltd. ( [2016] 72 taxmann.com 199 (Ahmedabad - Trib.)). 42. We have considered the submission and we find that the ITAT, Chennai, in the case of Computer Age Management Services (supra) dealt with identical issue and has held as follows: "18. Arguing on fourth common ground, which is on restriction of the claim of depreciation on software, ld. Authorised Representative submitted that ld. Assessing Officer had restricted the depreciation to 25% against 60% available for computer systems. According to ld. Authorised Representative, what was acquired were only software license which enabled the assessee to use the applications. According to him, by virtue of definition of software given in New Appendix I of Income Tax Rules, computers including computer software were eligible for 60% depreciation. 19. Per contra, ld. Departmental Representative submitted that what were acquired by the assessee was only a licence and could at the ....
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.... year under consideration the assessee has a brought forward provision from previous year of Rs. 50,45,729/- and the current year provision when aggregated resulted in the total provision of Rs. 2,66,85,994/- The assessee utilized Rs. 74,30,802/- out of this provision and the closing balance of the provision is reflected in the Balance Sheet of the assessee as of 31.03.2014. The assessee creates the provision at 0.6% of sales, which is based on past trend and historical evidence. For the purpose of arriving at this 0.6%, the assessee has considered the actual warranty utilized by the customers during the entire warranty period which may vary depending on the product from 1 year to 6 years. The assessee submitted the details of provision created and utilized year on year as per the Balance Sheet before the AO which is produced as under: (Amounts in Rs.) Particulars FY 2012-13 FY 2013- 14 FY 2014-15 FY 2015-16 Details of Covered Sales Covered Sales % increase as compared to previous year 303% 50% 12% Details of Warranty &....
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....nsistent method as conceived by the Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. (180 Taxman 422 (SC)). The DRP upheld the action of the Respondent. 46. The learned Counsel for the assessee submitted that the entire basis on which the Revenue authorities proceeded to make the impugned addition i.e., on the basis that the provision created was much more than what was utilized, is erroneous. In this regard, the learned Counsel for assessee drew our attention to a letter dated 28.05.2018 filed before the DRP on 28.05.2019, wherein the assessee has explained that it sells amplifiers, loud speakers, microphones, soundcraft, Studer and signal processing equipment and these products/equipment are subject to a warranty for periods ranging upto 6 years. The provision is created on past experience and on a scientific basis at 0.6% for amplifiers loud speakers and signal processors and of 0.3% for microphones, 0.2% for sound craft and at 1.3% for Studer. The learned counsel therefore submitted that the provision created at a fixed percentage of sales is based on historical trends and empirical evidence. 47. The DRP had confirmed the disallowance on the basis ....