AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (10) TMI 836
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....erprises as 'tested party' and deleting the total adjustment. 2. In the facts and circumstances and law point of the case, the order of the Ld. CIT(A) is erroneous because in absence of break-up of the expenditure incurred by the assessee and also without ascertaining the nature / utility of the software, it is simply not possible for the AO to ascertain whether software were useful for the day-to-day purpose or it gives enduring advantage to the assessee. 3. The appellant craves the leave to make any addition, alteration, modification etc. of the grounds either before the appellate proceedings, or in the course of appellate proceedings." 3. Revenue has raised the following grounds of appeal in AY 2015- 16: "1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the adjustment made by the AOITPO' amounting to Rs. 21,25,44,085/- on account of i) export of software services and ii) payment of Account Management charges. 2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in accepting the contention of the assessee that foreign AEs can be considered as the te....
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....tal income of Rs.163,93,56,650/- and for AY 2015-16, the return was filed on 28.11.2015 reporting total income of Rs.169,46,76,330/-. For both the years. the returns were selected for scrutiny assessment through CASS for which statutory notices were issued and duly served on the assessee and were duly complied in the course of assessment proceedings. The assessee is engaged in the business of information technology and I T consultancy services. Assessee is a wholly owned subsidiary of ITC Ltd. providing software services to its AEs as well as third party clients based in India and overseas. 6.1. Assessee has its software development centers based in Bengaluru, Kolkata, Pune and Trivendrum. Services catered by the assessee include banking and financial sector, consumer package goods, hospitality, media, entertainment, manufacturing, hotels, travel, transportation and logistics etc. Assessee has two subsidiaries in USA and UK viz., ITC Infotech USA (I2A) and ITC Infotech UK (I2B) respectively which were acquired from ITC Ltd. In the Form 3CEB and the Transfer Pricing Study Report filed by the assessee, it was stated that assessee has set up two marketing arms in USA and UK viz. I2....
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....ve support services and provision of management support services. The assessee has followed a transaction level approach for undertaking benchmarking analysis in its Transfer Pricing Study ('TP Study') wherein all international transactions have been analysed separately and the margin earned by 'least complex entity' has been benchmarked from arm's length perspective. In addition, the assessee had also provided IT services to its other AEs, British American Tobacco Shared Services, Pyxis Solutions LLC and Surya Nepal Private Limited. The benchmarking approach in the TP Study for all the above transactions entails carrying out a detailed functional, asset and risk analysis ('FAR') and economic analysis for each transaction. Based on the FAR analysis and the facts and circumstances of the respective transaction, assessee had benchmarked the profitability of the respective transaction. Thus, the economic analysis including the selection of tested party is based on the FAR profile of the transacting entities. The determination of margin for the tested party for the purpose of benchmarking analysis, is based on data derived from audited financial statements o....
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....assessee, that foreign AEs can be considered as the tested party. Aggrieved by the order of ld CIT(A), the Revenue is in appeal before the Tribunal. 8.5. Learned DR for the revenue submitted before us that ld. CIT(A) was not justified in accepting the contention of the assessee, that foreign AEs can be considered as the tested party for establishing arm's length price. In case of foreign AEs, accounting year ending is (January to December) 31st December every calendar year whereas in case of Indian entity, the accounting year ending is (April to March) 31st March every fiscal year. Therefore, it is not possible to compare the financial statements of foreign AEs, with Indian entity. If the foreign AEs are selected as tested party then it becomes difficult to find comparable companies for TP analysis. In case of foreign AEs, the revenue recognition method, expenses recognition method, and inventory valuation and recognition method are different therefore comparison of financial data is not possible, hence the foreign AEs should not be selected as a tested party. 8.6. On the other hand, ld Counsel for the assessee defended the order passed by the ld CIT(A). 9. We have heard b....
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....d not be the tested party. At this juncture, it is appropriate to go through the findings of Ld CIT(A), which is given below: "The next major contention raised by the Assessee is on the selection of foreign AE as the 'tested party'. The concept of 'tested party' is the very base of any transfer pricing analysis and it is a well-established principle (upheld by Indian judiciary and international guidance) that the tested party is the one performing lesser functions and carrying lesser level of risks. The Assessee has placed reliance on the following literatures to substantiate the point that the least complex entity is selected as the tested party: • United Nation's Practice Manual on Transfer Pricing for Developing Countries, 2013 (Chapter 10- Country Practices- India); (Para 10,4.1.3) • United Nations Practical Manual on Transfer Pricing for Developing Countries, 2017 (Part DCountry ^Practices- India); (Para D.3.2.3) • OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2010 (OECD TP Guidelines); (Para 3.18) • US TP Regulations (Section 1.482-5 of the Internal Reven....
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....ries Ltd. vs ACIT reported in (2016) 68 taxmann.com 322 (Delhi - Trib.) has overruled the earlier ruling in case of Ranbaxy Laboratories Ltd [[2008] 110 ITD 428 (DELHI)] which was relied upon by the Ld. TPO while rejecting overseas entities as the tested party . Further, the Mumbai tribunal in its case of Tata Motors European Technical Center Pic [2016] 66 taxmann.com 10 (Mumbai - Trib.) has also overturned the rulings pronounced in the case of Onward Technologies Limited [[2013] 26 ITR(T) 734 (Mumbai - Trib.)] and Cybertech Systems & Software Limited [[2013] 144 ITD620 (Mumbai - Trib.)] which was relied upon by the TPO in his TP Order. Combined to this, I am also in receipt of the jurisdictional ITAT ruling in the case of Development Consultants Limited (ITA No. 1591/KOL/2010) and Landis + Gyr Limited (ITA No. 37 and 1623/Kol/2012 (supra) which are in favour of the Assessee. Judicial jurisprudence suggest that if there are rulings with different opinions on the same issue, then the jurisdictional authorities ruling should be given weightage, Also, if an earlier ruling is ruled down by a later date ruling on the same issue, the latest ruling will get more weightage. Furthe....
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....at the assessee is more complex entity and foreign AEs are least complex entities, as reproduced in the order of Ld. CIT(A). This discussion has also been reproduced in the order of the Co-ordinate Bench of ITAT, Kolkata in assessee's own case in para 13. The conclusion drawn by the Co-ordinate bench after considering the discussion of TPO is reproduced as under: "It is abundantly clear that ld TPO has also stated that subsidiaries act primarily as marketing arm of the assessee and perform administrative services. It is the assessee which is entrusted with the task of performing the non-administrative, core and essential services. Therefore, the ld TPO has himself accepted that assessee is more complex entity and foreign AEs are least complex entity. Considering the factual position narrated above, it is abundantly clear that foreign AEs are least complex entity therefore foreign AEs should be treated as tested parties. That being so, we decline to interfere with the order of Id. C.I.T.(A) in treating foreign AEs as tested party. His order on this issue is ,therefore, upheld and the grounds of appeal of the Revenue are dismissed. 12. Considering the factual matrix in th....
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....ssee of treating the same as revenue expenditure. Assessee went in appeal before the Ld. CIT(A) and submitted that expenditure incurred on the purchases of application software have not resulted in any enduring benefit to the assessee and have been charged as revenue expenditure in the P&L Account. It was further submitted that these application software have limited useful life and are used as tools of business like any other component or consumable items used for the purpose of earning revenue. Assessee submitted that it has incurred these expenses to fine tune its business operations to enable the running of its business more effectively, efficiently and profitably. It was also submitted that this issue has already been dealt in the assessee's own case for AY 2005-06 and 2006- 07, held in favour of the assessee by the Co-ordinate bench of ITAT, Kolkata in its order dated 09.01.2015. It was also submitted by the assessee that this issue was also raised in AYs 2007-08 to 2013-14 and was deleted by the erstwhile Ld. CIT(A) in the respective years. 13.3. Considering all the submissions made by the assessee, Ld. CIT(A) examined the details of the software expenses incurred by the ....
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....rpose of Income Tax too. These application software, have had limited useful life and are used as tools of business like any other component or consumable item used for the purpose of earning revenue. The assessee company has incurred these application software expenses to fine tune its business operations thereby, enabling the running of its business more effectively, efficiently and profitably. We note that while disallowing the expenditure incurred on purchase of application softwares the Assessing Officer ignored the fact that Application softwares are used by the assessee for the efficient conduct of its business and do not extend any enduring benefit to the assessee company. After doing critical analysis, the ld CIT(A) noticed that software expenses to the tune of Rs. 15,58,281/- is enduring nature and therefore classified them as capital assests. We do not find any infirmity in the order of ld CIT(A), his order on this issue is hereby accepted and grounds of appeal raised by the Revenue are dismissed." 13.6. On confrontation of these submissions of the Ld. Counsel to the Ld. CIT, DR, nothing contrary was brought on record. Considering the factual matrix of the present cas....
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....had rejected the segmental accounts of the overseas entities used by the Assessee for the transfer pricing analysis mentioning that the segmental data which prepared the Assessee, was not audited either by the statutory auditors or the transfer pricing auditors. On this issue, the Assessee has produced judicial pronouncements before me, wherein the ratio emerges that the segmental accounts used in a transfer pricing analysis need not be audited. The Hon'ble ITAT in Lummus Technology Heat Transfer BV [2014] 162 TTJ 263 (Delhi - Trib.) has held that it is not necessary that a computation should be based on segmental accounts in the books of accounts regularly maintained by the assessee and subjected to audit. The Hon'ble ITAT held that the authorities were in error in rejecting the segmental results on the ground that the segmental accounts were not audited and that these segmental accounts were not maintained in the normal course of business. The Hon'ble ITAT also was unhappy with the action of the Ld. TPO for making vague generalizations to the effect that the accounts are manipulated, that allocation basis of expense is unfair and that these accounts conceal t....
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....due cognizance to the essence of the respective transaction. All the transactions are independent in terms of activities, purpose and through binding agreement. The cost of rendering/ receipt of services are also captured separately in the accounting system. In support of the same, the assessee has provided the segmental data of I2A and I2B for transactions with the assessee, the margin of which was benchmarked from arm's length perspective. We have gone through the findings of ld CIT(A) and do not find any infirmity. That being so, we decline to interfere with the order of Id. C.I. T.(A) in deleting the aforesaid additions. His order on this addition is, therefore, upheld and the grounds of appeal of the Revenue are dismissed." 14.2. From the factual position of the present case, where the segmental data of I2A and I2B for transaction with the assessee are placed on record against which the margin of the assessee has been bench marked for its arms length price, respectfully following the findings given by the Co-ordinate Bench in assessee's own case (supra), we do not find any infirmity with the findings given by the Ld. CIT(A) and accordingly, delete the additions made in ....
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....in Method (TNMM) 15.2. Views of the ld. TPO on the issue under consideration are summarily listed as below: "2. The Ld. TPO's view of the matter is - The assessee in support of the tested party had reiterated the functional, asset and risk profile of the assessee, ITC Infotech USA Inc. (I2A)* and ITC Infotech UK (12B) and had relied on multiple jurisprudence and international regulations. However no justification was provided in respect of revenue sharing model with I2A and I2B, which twisted the transactions in their favour, in spite of the fact, those two AEs undertakes minimal risk compared to the assessee. The claim in support of profitability in respect of transactions with AEs, do not found any reflection in the assessee's audited account, which sadly shows net profit well below the industry average. Further the assessee received management fee from the AEs, which indicates that it has necessary management control over the AEs, which may influence the revenue sharing agreements termed as Account management charges. In spite of this fact, the assessee allowed the AE to reap maximum benefit from any transaction with unrelated foreign entities, through these ....
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.... & .UK GAAP. which is very different from the Indian GAAP. The method of accounting, allocation of costs, recognition of revenues etc. are differ drastically. In the circumstances the financials prepared as per foreign accounting guidelines cannot be utilized in Indian context. It is further found that both I2A & I2B have substantial related party transactions and therefore the segmental data used for TP analysis is unreliable. In fact in the audited accounts of the UK subsidiary it is clearly mentioned that the related party transactions are not being furnished in terms of exemption provided in the UK accounting guidelines. Under these circumstances, the TPO was unable to verify the data of US & UK company and hence the analysis adopted by the assessee could not be followed. 6. In view of the above cited decisions and the reasons mentioned above; the TPO concluded that further held that foreign AEs i.e. I2A and I2B cannot be used as a 'tested party' under the Indian TP Legislation." 15.3. From the views of the Ld. TPO as noted above, we find that the Transfer Pricing adjustments are primarily on the basis of issues which have already been dealt in these two pre....
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....by my erstwhile order passed for the Ay 2010-11, AY 2011-12, AY 2012-13, AY 2013-14 and AY 2014-15. The segmental accounts prepared for a transfer pricing analysis may not necessarily be same as the segmental accounts prepared for any financial statements. In the absence of any mandate that the segmental for transfer pricing should be audited (as has been affirmed in various case laws cited by the Appellant), I am inclined to accept the contention of the Appellant that till the time the reliability of the segmental account is demonstrated, these can be used for a transfer pricing analysis and need not necessarily be audited. 2. On the ground and contentions of the Appellant pertaining to the comparability analysis, since the foreign AE is accepted as the "tested party" in my aforementioned decision, this ground requires no specific adjudication. 3. Overall, based on the facts and circumstances, and the law applicable, I am of the considered finding that the Ld. AO/TPO was not justified in making a transfer pricing adjustment of Rs.21,25,44,085 and accordingly the same is ordered to be deleted, and the transfer pricing grounds of appeal are fully allowed." 15.5.....