TaxTMI 
TaxTMI 
TaxTMI 
2022 (2) TMI 1283
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...., under Section 143(3) r.w.s 144C(13) read with Section 144B of the Income-tax Act, 1961 ('the Act'), on the grounds as set out herein: The following grounds are independent of, and without prejudice to, one another: Transfer Pricing Adjustment relating to international transaction pertaining to payment of royalty and service fee (subscription segment) - INR 171,407,494 1. The Ld. AO [along with the Learned Transfer Pricing Officer ('Ld. TPO')] under the directions of Hon'ble Dispute Resolution Panel ('DRP') erred on facts and in law, in determining the arm's length price for payment of royalty and service fees under subscription segment and thereby making an adjustment of INR 171,407,494 to the taxable income of the Assessee. In doing so, having grossly erred in: 1.1 modifying the economic analysis carried out by the Assessee in the Transfer Pricing Documentation ("TP Documentation') and arbitrary applying incorrect quantitative filters without providing any cogent reasons; 1.2 rejecting various comparable companies selected by the Assessee in the TP Documentation basis the provisions of Rule 10B(2) of the Rules; 1.3 introducing additional companies without ap....
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....ent relating to international transactions pertaining to provision of software support services - INR 68,493,639 3. The Ld. AO (along with the Ld. TPO) under the directions of Hon'ble DRP erred on facts and in law, in determining the arm's length price for provision of software support services and thereby making an adjustment of INR 68,493,639 to the taxable income of the Assessee In doing so, having grossly erred in: 3.1 modifying the economic analysis carried out by the Assessee in the TP Documentation and arbitrarily applying incorrect quantitative filters without providing any cogent reasons; 3.2 rejecting various comparable companies selected by the Assessee m the TP Documentation basis the provisions of Rule 10B(2) of the Rules; 3.3 introducing additional companies without appreciating that such companies are functionally dissimilar to the Assessee and violating the provisions of Rule 10B(2) of the Rules 3.4 considering fresh comparable companies without appreciating that such companies are functionally dissimilar to the Assessee; 3.5 not allowing relevant adjustments as per the provisions of Rule 10B(1) and Rule 108(3 and 3.6 arbitrarily disregarding th....
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....AO and Hon'ble DRP erred on facts and in law in preponing the income to the current C year, without appreciating that the books of accounts are duly audited and unqualified by the auditor, and the said income is offered to tax in the respective year in which it is accounted, thereby, it is revenue neutral; 5.4 Without prejudice to the above, the Ld. AO and Hon'ble DRP erred in not granting a corresponding deduction/relief of INR 276,267,924 on the preponement of income, for a corresponding increase in expenses in the nature of 'royalty' and 'service fees' payment as per the terms of the 'License and Service' agreement entered into by the Appellant with the AE and in view of the matching concept of accounting. Additions on account of Employee Stock Option Plan ('ESOP') expenses - INR 259,721,357 6.1 The Ld. AO and Hon'ble DRP erred on the facts and in law, in disallowing INR 259,721,357 on account of payments made by the Appellant for ESOPs granted to its employees by its associate enterprise i.e. Red Hat Inc., USA. While doing so: 6.2 The Ld. AO and Hon'ble DRP failed to appreciate the factual evidences filed by the Appellant which demonstrate that the payments were mad....
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....ns during the year under assessment as under: S. No. Associated Enterprise Nature of International Transaction Payment/Receipt by assessee Amount (in Rs.) Method used for determining ALP by the assessee 1 Red Hat Inc., USA Royalty as per Lincese and Services Agreement Payment 5,35,86,135/- TNMM 2 Red Hat Inc., USA Provision of ITeS Receipt 83,76,55,778/- TNMM 3 Red Hat Limited, Ireland Provision of ITeS Receipt 20,94,13,945/- TNMM 4 Red Hat Inc., USA Provision of Software Development Services Receipt 55,82,40,145/- TNMM 5 Red Hat Inc., USA Service Fees as per License and Service Agreement Payment 90,65,99,5 63/- TNMM 4. The assessee in order to benchmark its international transactions qua subscription segment proceeded on the premise that the assessee is engaged purely in resale activities for these subscriptions and Red Hat US service segment by using its global support centers around the world directly provides maintenance, development and production support to the customer during the subscription period. The assessee in order to bench mark its international transactions chosen Transactional Net Margin Method (TNMM) with OP/OR as the Profit Le....
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....d by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto. 11. The Ld. A.R. for the assessee challenging the impugned order relied upon its transfer pricing study and has also filed ground-wise chart, the copy of which was also supplied to Ld. D.R. However, on the other hand, the Ld. D.R. relied upon the order passed by the Ld. TPO/DRP/AO. Transfer Pricing Grounds Ground No.1 & Grounds No.1.1, 1.2, 1.3, 1.4, 1.5 1.6 & 1.7; Ground No.2 & Grounds No.2.1, 2.2, 2.3, 2.4, 2.5, 2.6 & 2.7; Ground No.3 & Grounds No.3.1, 3.2, 3.3, 3.4, 3.5 & 3.6; Ground No.4 & Grounds No.4.1, 4.2, 4.3, 4.4, 4.5 & 4.6 12. The Ld. TPO proposed adjustment of Rs.17,14,07,494/- and Rs.2,74,51,259/- qua international transactions pertaining to payment of royalty and service fee (subscription segment) on account of payment of royalty and service fee (service segment) respectively by modifying the economic analysis made by the assessee by rejecting the comparables and introducing new comparable and thereby determined the arm's length margin at 11.86% and 21.53% for subscription segment and service segment r....
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....red a margin of 1.4% of revenue earned from subscription segment and 13.50% of revenue earned from service segment. 18. The Ld. TPO aggregated transaction under the head 'Royalty and service fees' in each segment and considered the same as single transaction under the head 'software distribution activity and computer training/education activity' for the subscription segment and service segment respectively. 19. The Ld. TPO modified the economic analysis of the assessee by rejecting comparables chosen by the assessee by introducing new comparables and determined the arm's length margin of 11.8% in subscription segment and 21.53% in service segment. 20. The Ld. TPO after rejecting the benchmarking made by the assessee, however, accepted the TNMM with OP/OR as PLIs and finally selected three comparables and computed the margin in subscription segment as under: S. No. Name of the Comparable Company Weighted average operating margin on operating revenue (OP/OR)(%) 1 K7 Computing Private Limited 11.69 2 Innovana Thinklabs Limited 12.54 3 Virtual Galaxy Infotech Private Limited 11.35 Mean 11.86 21. The Ld. TPO accordingly determined the arm's length price of ass....
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....Pvt. Ltd. and Anthena Eduspark Ltd. qua the service segment. 26. Let us examine the suitability of these comparables sought to be excluded and included by the assessee for the purpose of benchmarking one by one as under: Subscription segment Comparable sought to be excluded Innovana Thinklabs Ltd. 27. The assessee challenged inclusion of Innovana Thinklabs Limited (for short Innovana) as a comparable on the grounds inter alia that it fails TPO's own turnover filters which has less than 10% of the assessee's turnover. This argument was also advanced before the Ld. DRP as per written submissions available at page A289 of the paper book wherein complete data on the basis of financials of Innovana is given as assessee's segmental revenue for subscription segment is Rs.1,44,43,45,751/- as against Innovana's turnover of Rs.6,60,95,449/-. We are of the considered view that when the Ld. TPO has himself applied this filter of turnover he cannot go against it and as such Innovana is not suitable comparable vis-à-vis assessee, hence ordered to be excluded. K7 Computing Pvt. Ltd. (K7) 28. The assessee challenged the inclusion of this comparable on the grounds inter alia that ....
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....doesn't find a place in the search process for subscription segment. We are of the considered view that when the assessee's business model has already been accepted by the Tribunal in assessee's own case in earlier years by holding that the actual payment of royalty and service fee both under subscription and service segment are in accordance with agreement entered into between assessee and its AE the rejection of the comparable chosen by the assessee and its benchmarking rejected by the Ld. TPO/DRP is not sustainable. So we direct the Ld. TPO to reconsider the aforesaid 9 comparables chosen by the assessee for benchmarking its transactions qua subscription segment. Service Segment Comparable sought to be excluded by the assessee MT Education Services Pvt. Ltd. (MT) 33. The Ld. A.R. sought exclusion of MT on the ground that it fails TPO's own turnover filters as MT's turnover is less than 10% of assessee's turnover i.e. assessee's segmental revenue from service segment is Rs.35,07,70,817/- as against MT's turnover of Rs.232.10 lakhs. When this comparable does not qualify Ld. TPO's own turnover filters it is not a valid comparable vis-à-vis assessee, hence, ordered to ....
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....ent Pvt. Ltd. 81.75 35th percentile 25.64 Median 32.64 65th Percentile 33.55 38. The Ld. TPO determined the arm's length price of SDS segment on the basis of margin of the comparables at 32.64% vis-àvis 15% of the assessee at Rs.8,56,29,184/-. 39. The Ld. A.R. for the assessee challenging the impugned adjustment on account of arm's length price qua SDS segment compressed the controversy by seeking exclusion of 7 comparables viz. Aspire Systems (India) Pvt. Ltd., Interglobe Technology Quotient Pvt. Ltd., Kelton Tech Solutions Ltd., Nihilent Analytics Ltd., Nihilent Limited, Dun & Bradstreet Technologies & Data Services Pvt. Ltd. and Infobeans Technologies Ltd. AND sought inclusion of two comparables viz. Maveric Systems Ltd. & SagarSoft India Limited. For benchmarking its international transactions qua SDS segment, let us examine the suitability of the aforesaid comparable challenged by the assessee one by one as under: Comparable Sought to be excluded by the assessee Aspire System India Pvt. Ltd. (Aspire) 40. The assessee sought exclusion of Aspire from the final set of comparables for benchmarking SDS segment on the ground that i....
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....per book shows that Nihilent is engaged in software development and consultancy, engineering services, web development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing and financials of Nihilent available at page No.A304, A405-A406 of the paper book shows that Nihilent has only one business segment and in the absence of segmental financials, as it is into diversified business, this company cannot be a valid comparable vis-à-vis assessee, who is a low risk entity working on cost + markup model. Hence, Nihilent is ordered to be excluded as a comparable. Nihilent Ltd. 46. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-à-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 & A413 ....
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....l and e-commerce. It is also providing software engineering services primarily in Custom Application Development (CAM), enterprise mobility and Big Data Analytics (BDA). 50. Perusal of financials available at page A303, A418 to A421, Infobeans shows that it is into diversified services but its segmental financials are not available without which it is difficult to compute the correct profit margin of the relevant segment. So Infobeans is also ordered to be excluded as a comparable being not a comparable to the assessee. Company Sought to be included by the assessee Maveric Systems Ltd. (Maveric) 51. The Ld. TPO rejected this comparable being functionally dissimilar to the assessee and it fails turnover filters which has been upheld by the Ld. DRP. The Ld. A.R. for the assessee contended that the company is similar to the assessee being into the business of software testing within India and outside India and it passes turnover filter in the relevant latest years. The Ld. TPO is directed to reconsider Maveric as a comparable in view of its segmental reporting and by bifurcating the turnover between product or service categories by providing opportunity of being heard to the ass....
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....ng into diversified business of providing publishing solutions i.e. type setting and data digitalization services for overseas publishers and supports international publishers through every stage of the author to reader publishing process. This company also provides digital first strategy for publishers across content production, enhancement and transformation, delivery and customer support and it is also engaged in research and development activities. 58. We have perused the annual report of MPS available at page A458-A460 of the paper book which shows the diversified functions being performed by MPS as contended by the assessee in the preceding para which are not comparable to the assessee who is a routine ITES service provider working on cost + model. 59. Moreover, the co-ordinate Bench of the Tribunal in the case of Credence Resource Management Pvt. Ltd. vs. ACIT, Pune (ITA No.133/PUN/2021 held that the activities of MPS are akin to a IT service provider and not an ITES service provider. So we direct to exclude MPS from the final set of comparables. Claim for working capital adjustment in all the four segments 60. The assessee sought working capital adjustment in all the f....
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....vt. Ltd. vs. ACIT (ITA No.451/Del/2013) & Huawei Technologies India Pvt. Ltd. vs. JCIT (ITA(TP)No.1939/Bang/2017). So we are of the considered view that the assessee is entitled for working capital adjustment. The Ld. TPO is directed to verify the computation furnished in transfer pricing study and detailed working capital adjusted margin computation furnished by the assessee and accordingly provide the working capital adjustment to the assessee in view of the settled principle laid down by the Tribunal, in order to provide level playing field for assessee as well as comparable company. Claim for Proportionate Adjustment 65. The assessee also sought grant of claim for proportionate adjustment for the value of international transactions thereby extending the quantum of transfer pricing adjustment to transactions with non AE also for two segments namely; "Subscription segment" and "Service segment" by relying upon the decision rendered by the Hon'ble Bombay High Court in the case of Hindustan Unilever Ltd. vs. CIT, Mumbai (Income Tax Appeal No.1873 of 2013) against which special leave petition has also been dismissed by the Hon'ble Supreme Court and decision rendered by the Hon'bl....
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....st of the Assessee 29,57,07,826 29,57,07,826 Arm's length Operating Revenue 26,82,56,567 26,99,31,675 Shortfall in the Revenue 2,74,51,259 2,57,76,150 68. Before proceedings with his argument the Ld. A.R. for the assessee brought to the notice of the Bench that he has already moved an application under section 154 of the Act with Ld. TPO which is pending adjudication to record the correct adjustment. In these circumstances, we are of the considered view that the Ld. TPO shall dispose of the application moved by the assessee under section 154 of the Act after verifying the working brought on record by the assessee to arrive at the correct adjustment made in this case within a period of three months. 69. Next issue raised by the Ld. A.R. for the assessee that the Ld. TPO has not complied with the directions issued by the Ld. DRP while giving effects to its directions that "the TPO to verify the working of the assessee and take the correct margin of calculation of valid comparables as discussed in the order. The Ld. A.R. for the assessee taken us to the Ld. DRP's orders available on the appeal set wherein these directions are given but the Ld. TPO has not complied with....
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....revenue recorded in profit & loss account of the assessee for the respective years, available at page B239, B252 of the paper book of volume-2. At the same time due taxes have been deducted and paid with Income Tax Authority while making such payment to Read Hat US. 76. However, the AO treated such advances received (unearned revenue) as income of the year under assessment by rejecting the revenue recognition policy followed by the assessee. 77. We have perused the order passed by the co-ordinate Bench of the Tribunal in assessee's own case available at page B22 to B57 wherein this issue has been decided in favour of the assessee by returning the following findings: "61. Upon careful consideration we find that assessee has been following consistent system of revenue recognition. The assessee is inter alia engaged in the business of marketing, promotion and sale of 'Red Hat subscriptions' to customers in Indian sub-continent to avail support services that are for the open source software system during the subscription period ranging from one to seven year, which is established by the special services agreement or contract. As per the consistent policy of revenue recognit....
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....revenue recognition adopted by the assessee. In the facts and circumstances elaborately dealt with above, we find due merits of the revenue recognition adopted by the assessee which is duly supported by mandate of AS-9 and other parameters referred above. 63. We also note that it is also a settled law that unless there is change in the facts and circumstances or that it can be said that earlier adopted system was wrong, revenue recognition method cannot be disturbed. We note that no such case exists here. In these circumstances, we set aside the order of the Assessing Officer and delete the addition in this regard." 78. Moreover, revenue recognition policy has been consistently being followed by the assessee over the years. This identical issue has also been dealt with by the Hon'ble Delhi High Court in the case of CIT vs. Dinesh Kumar Goel (197 Taxman 375) by relying upon the decision rendered by the Hon'ble Supreme Court in the case of E.D. Sassoon & Co. Ltd. vs. CIT (1954) 26 ITR 27, wherein the issue "whether the customer had paid entire fee in advance on which services remained due to be rendered in succeeding years, such receipts could not be considered as income accrued....
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....at US granted ESOPs/restricted stock units (RSU) to certain employees of the assessee for which Red Hat Inc. charged the ESOP cost of Rs.25,97,21,357/- from the assessee on cost to cost basis as per duly executed RSU gross charge agreement entered into between the assessee and the Red Hat Inc. available at page B77 to B82 of paper book-2. 81. The AO proposed the disallowance on the grounds inter alia that assessee has failed to submit copies of email exchange, resolution of board of directors and minutes of meetings wherein the decision to cross charge was taken; that RSU agreement is not acceptable on the ground of non submission of copy of the incentive scheme of Red Hat Inc. and independent valuation; that underlying internal memorandum to the cross charge agreement has been issued by the assessee and not by the Red Hat Inc.; that letter was dated 10.10.2014 and the effective date of cross charge recharge agreement is April 15th, 2015; that the payment is contingent in nature and there is a lack of clarity whether ESOP actually granted to the assessee; that the ESOP expenditure is not fully incurred for the purpose of business of the assessee and that without prejudice to the a....