TaxTMI 
TaxTMI 
2022 (11) TMI 1017
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....#39;ble DRP') grossly erred in adjusting the transfer price by INR 1,18,75,36,269/- with respect to the international transactions undertaken by the Appellant, under section 92CA of the Income Tax Act, 1961 ("the Act"). 1.2. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant by invoking provisions of sub-section (3) of section 92C of the Act. 1.3. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the economic and comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price ('ALP') of the international transactions thereby following a non-transparent approach. 1.4. The learned AO/ learned TPO/ Hon'ble DRP erred in selecting the companies only if the data pertaining to Financial Year ("FY") 2015-16 is available in the public databases. 1.5. The learned AO/ learned TPO/ Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies thereby not considering ....
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....es Private Limited; Eluminous Technologies Private Limited; Sagarsoft (India) Limited; Ace Software Exports Limited; Synfosys Business Solutions Limited; ksummation Technologies Private Limited; frifoMile Technologies Limited; and Mildunuru Limited. 1.16, The learned AO/ learned TPO/ Hon'ble DRP has grossly erred in computing the margin of the following companies: CG-Vak Software & Exports Ltd; kals Information Systems Ltd; Cybage Software Pvt. Ltd; Harbinger Systems Pvt. Ltd; and Orion India Systems Pvt. Ltd. INTEREST ON RECEIVABLES 1.17. The learned AO/ learned TPO/ Hon'ble DRP erred in treating a delay in receivables or deferred receivables as an international transaction. 1.18. The learned AO/ learned TPO/ Hon'ble DRP erred in not appreciating the fact that TP adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. 1.19. The learned AO/ learned TPO/ Hon'ble DRP erred in disregarding the fact that the receiva....
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....RP has erred in law, in disregarding the decision of Jurisdictional Karnataka High Court in the case of Biocon Limited, [2020] 121 taxmann.com 351 (Kar.) and Bangalore Tribunal in the case of Novo Nordisk, [2014] 42 taxmann.com 168 wherein it was held that discount on issuance of ESOP is an allowable business expenditure under section 37 of the Act 2.3. The learned AO and Honorable DRP has erred in law and on facts by stating that there is no outflow of money resulting in an expense whereas the fact is that there is a clear outflow of economic resources/cash in the hands of the appellant, which is wholly and exclusively used for the purpose of business in India. 2.4 The learned AO and Honorable DRP has erred in law and on facts by not appreciating that the difference between the market value and the purchase price of shares is being taxed as perquisite in the hands of the employees. 2.5. The Learned AO and Honorable DRP has erred in law and on facts, in disregarding the sample debit note/invoices, Employee listing, sample Form 16 copies, cost reimbursement agreement, sample RSU agreement and scheme document submitted during the DRP proceedings by the Appe....
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....garding that the remittance towards recovery of ESOP charges is not taxable under the provisions of India-USA Double Taxation Avoidance Agreement 2.14. The learned AO has erred in law and on facts by contending that the said ESOP cross charge is liable to TDS under section 192 of the Act as perquisite in the hands of the employees and same is also liable to TDS under section 195 of the Act on the reimbursement to the Ultimate Holding Company thereby resulting in double taxation of same amount. 2.15. The learned AO has erred in law and on facts by contradicting his own statement by stating that in one hand there is an element of income included in the reimbursement made to the Ultimate Holding Company for the expenditure on ESOP whereas on the other hand the learned AO states that the said expenditure is notional/fictitious in nature. 3. Other Corporate Tax related grounds 3.1. The Learned AO, while assessing the total income of the Appellant for the year under consideration, have erred in not allowing a deduction for education cess and secondary & higher education cess (collectively known as "education cess") for the year under consideration, alt....
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....21 4) LG Soft India Pvt. Ltd, AY 2016-17; Bangalore ITAT IT(TP)A No.266/Bang/2021 5) ADP Pvt. Ltd., AY 2016-17; Hyderabad ITAT ITA Nos. 227 & 228 /H/2021 6) Yahoo Software Development India Private Limited, AY 2017-18; IT(TP)A No. 178/Bang/2022 7) Yahoo Software Development India Private Limited, AY 2015-16; IT(TP)ANo.2657/Bang/2018 & IT(TP)ANo.2365/Bang/2019 8) Goldman Sachs Services Private Limited, AY 2015-16; IT(TP)A No. 2355/Bang/2019 9) LG Soft India Pvt. Ltd, AY 2015-16; Bangalore ITAT IT(TP)A No.2412/Bang/2019 10) Hewlett Packard India Software Operation Pvt. Ltd., AY 2014-15 Bangalore ITAT, IT(TP)A No. 3400/Bang/2018 11) Hewlett Packard India Software Operation Pvt. Ltd., AY 2013-14 Bangalore ITAT, IT(TP)A No. 2866/Bang/2017 4. Ld. D.R. submitted that the company is engaged in providing Application Maintenance and Development, Enterprise Resource Planning and specialized services like Data Warehousing and Business Intelligence, Testing Services and Infrastructure Management Services. The services offerings are focussed mainly towards four verticals namely manufacturing, utilities, financial services....
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.... reference to sale of products. The financial statements do not mention about any product sale or inventory. As there is no revenue stream on account of product sales, there is no merit in the argument that the company is engaged in product sales. Accordingly, Ld. DRP hold that this company is functionally comparable to the assessee. 4.2 On the pleas as to presence of brand, Ld. DR stated that Ld. DRP in his order noted that, there is no specific information in the financial statements to indicate that the brand has contributed to revenue growth of the company. On the other hand, the company has recognized client relationships and employee relationships as significant factor that has contributed to the revenue growth of the company. As to the significant factors contributing to the revenue growth, the annual report recognizes, "Client relationships are at the core of our business. We have a history of high client retention and derive a significant proportion of our revenue from repeat business built on our successful execution of prior engagements"; and further states, "A principal component of our ability to compete effectively is our ability to attract and retain qualified emp....
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....ormation to demonstrate the said plea. Having examined the plea, Ld. DRP noted that with the acquisition of M/s. Information Systems Resources Centre Private Limited, it had become wholly owned subsidiary in the earlier year operating in the same field of rendering software services. The Scheme of amalgamation was approved by the Hon'ble High Court of Bombay, vide its order dated 4 Sept 2015 with effect from 17th Oct 2014. The method of accounting to give effect to the amalgamation into the accounts is discussed at pages 115-116 of the annual report. As per the said information, net assets to the tune of Rs.192.41 million has been transferred to the comparable company as on 31.3.2015; the profit of the transferor company for the period 17th Oct 2014 to 31.3.2015 was given to be Rs.27.35 million. For the current year, there is no impact as such, as the transferor company is also in the same line of business activity- namely software development services. Thus, there is no functional difference so as to affect comparability on account of the said acquisition. On further perusal of the financial reports for the three years, Ld. DRP noted that there is no impact on the profitability of....
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....Pvt. Ltd. (supra) has excluded following 3 companies holding them as not good comparable companies. (A) Persistent Systems Ltd:- 33. We have considered the rival submissions. We find that on the question of application of RPT filter, the assessee had made the following submission before the DRP:- 4. Fails the Related Party Transaction to Sales filter applied by the learned TPO In the show-cause notice issued, the learned TPO has excluded companies for which the ratio of RPT to sales exceeds 25% during the current year i.e., during FY 2014-15. The relevant extract from the show-cause notice is reproduced below for ease of reference: e) Companies who have more than 25% related parry transactions of the sales were excluded. Companies having related party transactions of more than 25% are proposed to be excluded. A threshold of 25% is being applied following the provisions of Section 92A(2)(a) which provides a limit of 26% of the equity capital carrying voting rights for treating an enterprise as Associated Enterprise. if the limit is reduced further it would only result in eliminating more and more companies, on the other hand if t....
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....ith a company which does not have any onsite revenue. In this regard, the ld. counsel for the assessee placed reliance on the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. v. DCIT, ITA No.1054/Bang/2011 for AY 2007- 08 dated 23.11.2012 wherein this Tribunal took the following view:- "64. The next objection of the Assessee is that when the most appropriate method selected for determining ALP is the TNMM there is no reason as to why one should look at price difference in offshore software development and onsite software development. It is no doubt true that in TNMM it is only the margins in an uncontrolled transaction that is tested with reference to the controlled transaction but it is not possible to ignore the fact that pricing will have an effect on the margins obtained in a transaction. The argument that if pricing structure were to be considered as criteria, then it will have to be seen as to what is the pricing structure of all the comparable for various projects cannot be accepted because the TPO has not chosen any other onsite software service provider with a revenue composition of more than 75% from onsite software se....
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....ditions in which both the buyer and seller of services located. Hence, the companies in which more than 75% of their export revenues come from onsite operations are to be excluded from the comparability study as they are not functioning in similar economic circumstances to that of the tax payer. Hence, it is held that this filter is appropriately applied by the TPO. 68. Admittedly the onsite revenue in the case of the following comparable companies identified by the Assessee was more than 75% of its export revenues viz., a) Visu International Ltd. b) Maars Software International Ltd. c) Akshay Software Technologies Ltd. d) VJIL Consulting Ltd. e) Synfosys Business Solutions Ltd. The above companies were therefore rightly not considered as comparable by the TPO. We hold accordingly." 36. It is seen that the TPO in coming to the conclusion that the onsite revenue filter is not applicable has placed reliance on the decision of the ITAT Mumbai Bench in the case of Capegemini as quoted in para 16 in para 14 of the TPO's order, but that decision does not deal with a case of onsite revenue filter and the decision was rendered on the facts of its own case. 37. On....
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....gh Court (C) INFOSYS LTD. 39.The next company which the assessee seeks to exclude is Infosys Ltd. As far as this company is concerned, it is seen that the following are the functional dissimilarities brought to our notice:- "Functionally dissimilar - owns intellectual properties, incurs significant R&D costs & onsite activity. - Engaged in diversified business activities. - Involved in development of software products in addition to software services. - Owns intellectual property rights. - Incurs significant research and development costs. - Carries out significant activities based on onsite business. - Owns products such as Finacle, Edge Verve and other product based solutions. Extra-ordinary event of merger with Infosys Consulting India Ltd. Segmental profit & loss account not available. Commands substantial brand value. 40. The DRP, however, has not thought it fit to exclude this company by observing that this company has substantial pre-dominant revenue from software services and the growth was not attributable to any brand value. Presence of onsite activity and ....
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....d provides customised services to its offshore clients comprising. Entire revenue received by this comparable ease under one single segment of sale of software. This company also owns software licenses. 14.3.3. In our considered opinion this comparable cannot be considered to be functioning in 100% risk mitigated environment and is a full-fledged enterprise. Such a comparable cannot be compared with a captive service provider like assessee. Accordingly we direct this comparable to be excluded from finalist." 9. Following the above said decisions rendered by co-ordinate benches, we direct exclusion of Persistent Systems Ltd., Larsen & Toubro Infotech Ltd. and Infosys Ltd. & Infobeans Technologies Ltd. from the final list of comparables." 3.6 Further, in the assessment year 2016-17, the coordinate bench of Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA Nos.227 & 228/Hyd/2021 dated 3.2.22 held as under:- "4.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. We find substance in the submissions of the ld. AR and on going through the financial statem....
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....s constituted only 0.11% of total revenue. In this regard, Ld. A.R. relied on the following decisions of the coordinate benches of ITAT Bangalore & Hyderabad as mentioned below:- 1) M/s. Advice America Software Development Centre Private Limited ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14 2) Mercedes Benz in IT(TP)A No.1497/Bang/2017 for the A.Y. 2013-14. 3) EIT Services India Pvt. Ltd., AY 2016-17, Bangalore ITAT, IT(TP)A No.210/Bang/2021 4) LG Soft India Pvt. Ltd, AY 2016-17; Bangalore ITAT, IT(TP)A No.266/Bang/2021 5) Optiva Indian Technology Pvt. Ltd., AY 2016-17; Pune ITAT ITA No. 194/PUN/2021 6) ADP Pvt. Ltd., AY 2016-17, Hyderabad ITAT, ITA Nos. 227 & 228 /H/2021 7) Yahoo Software Development India Private Limited , AY 2017-18 IT(TP)A No. 178/Bang/2022 8) Yahoo Software Development India P Ltd, AY 2015-16 IT(TP)ANo.2657/Bang/2018 & IT(TP)ANo.2365/Bang/2019 9) Goldman Sachs Services Private Limited, AY 2015-16, IT(TP)A No. 2355/Bang/2019 10) LG Soft India Pvt. Ltd, AY 2015-16, Bangalore ITAT IT(TP)A No.2412/Bang/2019 11) EIT Services India Pvt. Ltd, AY ....
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....s reply u/s 133(6) that it is predominantly engaged in software product development services only. The relevant extract of the reply is as under: - "Persistent System Limited is predominantly engaged in the business of providing outsourced software product development services to customers across the globe from following industry verticals: Infrastructure and systems, Telecom and Wireless, Life science and Healthcare and Financial services. The company reports segment information based on the above industry verticals. The nature of services provided under each of these segments differs only in terms of the industry and specific requirements of customers in each of these industries. The essential activity across all business segments can be considered to be software product development services". 7.2 Ld. D.R. submitted that as could be seen from the information contained in the annual report of this company, and the clarification submitted by the company in its reply to the notice under sec. 133(6) of the Act, it is very clear that the company is predominantly engaged in software product development services and hence it is functionally comparable to the assesse....
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....t is also relevant to note that this company has clarified in its reply given u/s 133(6), that M/s Persistent Systems Ltd is predominantly engaged in the business of rendering software development services; the revenue reported is primarily on account of rendering of software development services only. The relevant extract is as under "In respect of the information you have requested under 3(a) and 3(c) in respect of software products and innovations, overseas subsidiary companies of Persistent Group have acquired certain Intellectual Property (IP) products and generating some revenue from licencing and support of these products. in case of PSL India, which is predominantly engaged in the business of rendering software development services, the revenue reported is primarily on account of rendering of software development services only" The above clarification also makes it clear that this company is not into diversified activities. 7.7 Further, it is seen that the expenditure incurred towards R&D as per page 203 of the annual report was Rs.62.58 million, which constitute meagre 0.43% of operating revenue. Further, the capital expenditure towards R&D was only Rs.0.....
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.... the plea as to how it affects comparability. He noted that these are routine operating expenses incurred by the company for its operational activities, and does not affect comparability as such. Besides under the TNMM, the net profit margins are compared and there is no requirement to make item to item comparison of expenses of the enterprises. Thus, Ld. DRP did not find merit. in the plea and accordingly rejected. 7.10 It was also pleaded that the company had incurred advertisement and sponsorship expenses to the tune of Rs.16.01 million, which constituted meagre 0.11% of total revenue and thus it is insignificant to materially affect comparability or profitability. Besides, under TNMM methodology, there is no requirement to make item to item comparable analysis of expenditure. Hence, these pleas are rejected. 7.11 Further, it is seen that this company was held to be engaged in software development and not a product company and hence functionally comparable to a software service provider company, by the ITAT Bangalore in the case of M/s. Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14). In ....
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....ike the assessee before us. The relevant portions has been reproduced by us in the above paras. Respectfully following the same, these two companies are also directed to be excluded from the final list of ITA No 2233 of 2018 ADP Private Ltd Hyderabad comparables. Thus, assessee's ground of appeal No. 2 is partly allowed." 6.3 In the said decision, it has been held that the company is functionally different and engaged in diversified activities and since the revenue could not controvert the said decision nor brought any contrary decision, following the same, we direct the AO/TPO to exclude this company from the final list of comparables." 8.1 In view of the above decision of the Tribunal, we are inclined to hold that Persistent Systems Ltd. cannot be considered as a comparable and to be excluded from the list of comparables. In view of this, we exclude this company from the list of comparables. Infosys Limited:- 9. Ld. A.R. submitted that this company's predominant revenue is from software service. Growth of revenue of this company is not on account of its brand or any exceptional event. Data analytics is not functionally different from SWD. R&D Expenditure of ....
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....lly comparable to the assessee. The pleas that it has diversified activities, rendering services to various industries, and hence it is functionally dissimilar are rejected by Ld. DRP. 10.1 It was pleaded before Ld. DRP by the assessee that this company has a huge brand which has contributed to its growth in revenue and hence not comparable. A perusal of the annual report by the Ld. DRP shown that the growth in revenue was on account of various business initiatives taken to accelerate growth such as - internal re-organization, implementing cost effectiveness through reducing cost of operation, improving utilization percentage of employee, restricting the organization for agility by creating smaller and nimbler sales regions, redesigning supply chain functions, reducing attrition rate, increasing the offshore mix, improving delivery expertise etc., As per information in page 20 of annual report, 97.1% of revenues was from repeat business. At page 71 of the annual report, it is discussed, "clients often cite our industry expertise, comprehensive end-to-end solutions, ability to scale, superior quality and process execution, global delivery model, experienced management team, talen....
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.... for immediate business purposes for developing expertise and improved process execution. It was also pleaded that by the assessee before Ld. DRP that the company has significant intangibles. However, on perusal of the information at page 109 of the annual report, Ld. DRP noted that the value of intangible assets as on 31.03.2016. was Rs 30 crore and as on 31.0.2015 was. Rs.42 crore, which is insignificant considering its turnover of Rs.53,983 crore and net Asset portfolio of Rs.8248 crore. Ld. DRP also noted that, the assessee has failed to establish that such differences, if any, on account of R&D, brand and intangibles have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B. Besides, he also noted that the assessee leverages on the intangibles owned by the AEs without factoring the corresponding cost in its analysis. Further, as per the Service Agreement with the AE, the intangibles/ intellectual property generated by the assessee and the Methodology/ ideas/concepts/algorithms developed by it during the performance of the services are assigned to the AEs without compensation. Taking into account all these aspects, Ld. DRP did n....
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....igh or low profit rate. Further, the Delhi Tribunal in Nokia India Pvt Ltd (ITA No.242/0/2010) has held that a potentially comparable company cannot be excluded for the reason of high or low turnover or high or low profit margin. In reaching this conclusion, the Delhi bench also considered a special bench order passed in the case of Maersk Global Centre India Pvt Ltd. Vs ACIT (2014) 147 1TD 83 (BOM)(SB)'. Similarly, the Mumbai Tribunal in Capgemini, took note of the ITAT, Bangalore decision in Genisys (supra), and other Tribunal decisions to conclude (in Para 5.3.5 & 5.3.6) that there was no such correlation of profit margins with the turnover of the IT companies, which is primarily based on skilled manpower and related costs, and that the classification based on turnover made in Dun and Bradstreet study was not based on profit margins and hence not relevant. The ITAT, Bangalore, in a recent decision Societe Generale Global Solution Centre Pvt. Ltd. vs. DCIT in IT(TP) appeal No.1188(Bang) of 2011, dated: 22.04.2016, [2016] 69 Taxmann.com 336(Bangalore Trib.) has also held that turnover cannot be a criteria for selection of comparables. 10.6 In its latest judgement dated 12/0....
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....nch of Hyderabad cited (supra), wherein held as under:- 9.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The co-ordinate bench in assessee's own case in ADP (P.) Ltd. (supra), directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: '25. Having regard to the rival contentions and the material on record, we find that in a number of decisions including the assessee's own case, Infosys Ltd has been held to be not comparable with any other software development company such as the assessee due to its huge turnover and high profit margin and also as it is into software products and owns intangible intellectual property rights. In the case of Agnity India Technologies Ltd, 36 Taxmann.com 289 (Del), the Hon'ble Delhi High Court has held that Infosys Ltd is not comparable to other software development company. Relevant paragraphs are reproduced hereunder: " 8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The Tribunal for valid and good reasons has point....
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....re Exports Limited; x. Synfosys Business Solutions Limited; xi. Isummation Technologies Private Limited; xii. InfoMile Technologies Limited; and xiii. Mudunuru Limited. 13.1 However, the assessee pressed for inclusion of following comparables only:- i. Sasken Communication Technologies Limited; ii. Evoke Technologies Private Limited; iii. Sagarsoft (India) Limited; iv. Ace Software Exports Limited v. Isummation Technologies Private Limited; i. Sasken Communication Technologies Ltd.:- 14. The Ld. A.R. submitted that this is functionally different and he drew our attention to the order of the TPO wherein the TPO gave his remarks that this company is into Embedded design and programming. Sasken is engaged with several of the top 10 vendors in the semiconductor industry providing a range of IC Design and Software Services for their flagship development, integration and testing services. TPO stated that he has identified key sectors that offer growth opportunities for the assessee in ER&D services and have sharpened their focus on them. Overall, TPO believed that assessee's company is well position....
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.... Limited; respectively. The assessee's ground Nos.4(i) and 4(iv) are accepted therefore." 16.1 In view of the above order of the coordinate bench of Hyderabad Tribunal, we direct the AO/TPO to include this company in the list of comparables. ii. Evoke Technologies:- 17. The Ld. A.R. submitted that the final sales are unreliable as the figures from branch office outside India was included. From Note 2.29 on page 29 of the annual report of the company, it was noticed by the TPO that the standalone financials reported for the year 2015-16 include revenue and net-profit figures of one branch outside India also. The relevant portion of annual report is reproduced as below:- 'Note 2.29 the Balance sheet and Profit and Loss account include the unaudited financial statement of a Branch situated outside India, whose financial statements reflect liability of Rs.4,75,78,953/- as at 31st March, 2016, revenue of Rs.13,00,22,161 for the year ended as on dated 31st March 2016 and branch net loss of Rs.27,33,756/- for the year ended 31st March, 2016.' 17.1 Ld. TPO stated in his report that since the financials include figures from an outside branch, which are unaudited and hen....
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....and referred page 40 of the TPO order wherein he observed that the company fails the SWD service revenue > 75% filter. Hence, it was rejected by the TPO. In this regard, Ld. A.R. relied on the following decisions of the coordinate bench of ITAT Bangalore as mentioned below:- 1) EIT Services India Pvt. Ltd., AY 2016-17, Bangalore ITAT IT(TP)A No.210/Bang/2021 2) Mindteck India Limited, AY 2016-17, IT(TP)A No 252/Bang/2021 21. The Ld. D.R. relied on the order of lower authorities. 22. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in the case of EIT Services India Pvt. Ltd. cited (supra) where in it was held as under:_ "9.7 Ld. A.R. submitted that the learned TPO in in the TPO order (Page 49) has erroneously rejected Sagarsoft by stating that it fails service revenue filter. To this the Ld. A.R. stated that Sagarsoft has an IT service income to sales percentage of 100% and hence passes the aforesaid filter and must be accepted as a comparable company. 9.8 The Ld. A.R. further submitted that Sagarsoft is engaged in software development services. The rele....
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....19 of the paper book. The company is functionally similar as it is engaged in SWD activity which is evident from page 7 of the Annual Report. 10.1 Further, the comparable has been accepted by the Ld. DRP in AY 2017-18 in Appellant's own case. (He referred Page 66 of the Case Law Compilation) 10.2 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to include this comparable to the final list of SWD/IT Segment. 10.3 Ld. D.R. relied on the order of Ld. DRP. 10.4 We have heard the rival submissions and perused the materials available on record. In this case, it was excluded by Ld. DRP in assessment year 2017-18. We do not find any reason to exclude in the assessment year 2016-17. Being so, we direct the AO/TPO to include this company in the list of comparables." 25.1 In view of this, we direct the AO/TPO to include this company in the list of comparables. Isummation Technologies Pvt. Ltd. 26. The Ld. A.R. submitted that the AO has not commented on this comparable and he submitted that this company has been included in the case of EIT Services India Pvt. Ltd. cited (supra) in the A.Y. 2016-17 and the same may be ....
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....some material on record that there has been under charging of real income. The learned AO/ learned TPO/ Ld. DRP erred in disregarding the fact that the receivables are arising out of transactions that are being determined to -be at arm's length by application of Transactional Net Margin Method ("TNMM") and in separately adjusting the -receivables on account of excess credit period. They further erred in not considering the fact that the outstanding amount from the money advanced by the assessee would get adjusted in the working capital adjustment and hence no separate adjustment is required. They further erred in computing interest on the outstanding balance from the AE by evaluating on invoice by invoice basis even though the weighted average period period of receivables of the Appellant is only 24 days, which is less than 30 days as accepted by the Ld. TPO. They also erred in imputing interest on the outstanding receivables from AEs ignoring the fact that the Appellant followed the same policy of not charging any interest on trade receivables from both AEs as well as Non-AEs. Without prejudice, the learned AO/ learned TPO/ Ld. DRP erred in computing notional interest by consi....
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....es. From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus 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. 23.1. Ld.TPO computed interest on outstanding receivables under weighted average method using LIBOR + 300 basis points applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. 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. 23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Hea....
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....thin transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non-payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest 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 v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 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 ....
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....have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd v. 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 ....
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....the Company, based on the disclosures made in the financial statements (refer note 25 of the financial statements). During the proceedings, the AO had specifically sought responses to following questions: "A. Expenses incurred on remittance made to non-residents and whether section 195 of the Act, has been complied with? B. In respect of ESOP cross-charges incurred by the assesse company, furnish a detailed note on modus operandi of ESOP calculation and vesting period option exercised by the employees and whether section 195 is applicable" 34.2 In response to the above the Company had furnished its response vide submission dated 06 December 2019, explaining the reasons why Tax Deduction at Source ("TDS") provisions are not applicable on the subject cross-charges, which are on cost-to-cost basis. 34.3 However, in the DAO the learned AO proceeded to make adjustments under section 37 of the Income-tax Act, 1961 ("the Act") (without providing the Company any opportunity to explain allowability of expenditure), while the AO also noted his observation on non-deduction of TDS under Section 195 of Act, in the DAO. 34.4 Ld. A.R. highlighted that the questions soug....
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.... are considered as a part of salary income of the concerned employees of HPISO, based on perquisite valuation rules and accordingly taxed in their hands. * The stock options vest to employees and become exercisable according to the vesting schedule. * Illustration/Mechanism Particulars Refer Amount Market Price A 30 Exercise Price/Purchase price for the employee B 20 No of shares allotted C 1500 ESOP expenses cross-charged to HPISO 15,000 [1500*(30-20)] He submitted that the cross-charges to HPISO is in respect of actual cost incurred towards options exercised and shares purchased by employees of HPISO. AR's submissions on ESIP Scheme 34.9 ESIP schemes provides for various incentives. In India, employees of HPISO are eligible to receive stock awards (in the form of Restricted Stock Units, hereinafter referred to as "RSU") and stock options. The rewards under the stock options and RSU, are explained in the paragraphs below - * RSU represents Restricted Stock Unit. As per the scheme, upon completion of vesting period, the employees will be eligible to receive reward in the form of shares. HPE gran....
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....mmends the list of eligible employees to the ESOP Committee, based on employee performance and the other parameters. * Ultimate Holding Company's responsibility is limited to grant of these shares to employees of HPISO as the shares are listed in stock exchange in USA. HPISO will handle all the paperwork, collection of options, providing eligible list of employees with number of shares to be granted, perquisite computation for the employees, TDS computation on perquisite and remittance thereof, etc. as the actual beneficiary of such shares are the employees of HPISO. 34.11 In connection with the above, Ld. A.R. submitted that the differential price/full price of the shares granted under these schemes are considered as a part of 'perquisite' taxable in the hands of employees under section 17(2) of the Act. Accordingly, the Company has deducted appropriate TDS under section 192 of the Act. ESOP Cross-charqes represents actual cost to HPISO 34.12 Ld. A.R. submitted that the ESOP cross-charges incurred by the Company represents the actual expenditure incurred by the Company. The remittance made towards such cross charges are in fact in the nature of incent....
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....exclusively for the purposes of the business or profession, not being in the nature of capital expenditure or personal expenses, shall be eligible for deduction in computation of total income". In the subject case, we wish to submit as under: * The ESOP schemes for stock options enables in attracting and retaining the employees of the Company, resulting in better performance of the Company's business operations. The scheme is designed primarily to incentivise and for retaining the employees and thereby earn more revenue by securing consistent and concentrated efforts of dedicated employees. * Further, the share based compensation under the ESOP scheme is construed both by the employees and the Company as a part of employment remuneration package, which is an expenditure inextricably linked to the business of the Company. * On similar facts, Income-tax Appellate Tribunal ("Tribunal"), Bangalore in the case of Nova Nordisk India Private Limited (ITA NO 1275/Bang/2011) (copy enclosed as Annexure 8) has held that ESOP expenditure incurred is deductible under Section 37(1) of the Act. * In the cited case, the Tribunal was dealing with the expen....
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....es Ltd (ITA No.4841/Mum/2013) (Mumbai ITAT) CERA Sanitaryware Ltd (ITA No.2817/Ahd/2011) (Ahmedabad ITAT) Aditya Birla Nuvo Ltd (ITA No.3178/M/2012) (Mumbai ITAT) − HDFC Bank Ltd (ITA No.374/Mum/2012) (Mumbai ITAT) − Inox Leisure Ltd (ITA Nos.374 & 523/AHD/2012) (Ahmedabad ITAT) − Korn Ferry International Pvt Ltd (ITAs No.5152/Mum/2012) (Mumbai ITAT) Sandvik Asia Pvt Ltd (ITA Nos.1841 & 1842/PN/2012) (Pune ITAT) Religare Commodities Limited (ITA No.2283/Del/2013 and ITA No.3634/Del/2014)(Delhi ITAT) − DCIT vs Kotak Mahindra (IT APPEAL NO. 698 (MUM.) OF 2016)(Mumbai ITAT) − CIT v. Lemon Tree Hotels Ltd. [IT Appeal No. 107 of 2015, dated 18-8-2015] − CIT v. PVP Ventures Ltd. [2012] 23 taxmann.com 286/211 Taxman 554 (Mad.) 34.19 Therefore, Ld. A.R. submitted that it is amply clear that cross-charges towards ESOP scheme is an expenditure incurred by the Company wholly and exclusively towards its business. Expenditure incurred is not notional expense 34.20 As explained in the earlier paragraphs, the expenditure incurred on ESOP cross-charges represents actual expenses, evidenced f....
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....wrongful application of section 37(1) of the Act. The learned AO had also erred in stating that the subject cross-charges were subject to withholding under Section 195 of the Act. In the paragraphs below, the Company submitted its contention against the application of section 195 of the Act. Provisions of section 195 of the Act shall not apply 34.29 At the outset, Ld. A.R. reiterated that the Company has deducted appropriate TDS under section 192 of the Act in respect of share based compensation under ESOP schemes, as 'perquisites' under section 17 of the Act. Accordingly, it is submitted that the ESOP cross charges are subject to TDS provisions under section 192 of the Act and the same is in accordance with the Circular No. 17/2014 issued by the Central Board of Direct taxes for computation of taxable income of employees. 34.30 Without prejudice to the above, Ld. A.R. submitted the following:- * As mentioned earlier, the cross charges from the Ultimate Holding Company represent the cost of these shares as incurred by the Ultimate Holding Company in respect of shares granted to employees of HPISO and exercised by them. Accordingly, the subject cross charge....
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....ilms vs Income Tax Officer, International Taxation [2017] 81 taxmann.com 378 (Chennai - Trib.) 34.32 While the AO has considered the decision of GE India Technology Cen.(P.). Ltd in the DAO but without examining the facts of the case, has proceeded to conclude that ESOP cross charge is in the nature of income and are taxable under the Act. 34.33 The learned AO has neither examined nor has given any factual finding as to how the element of income is embedded in the reimbursement of ESOP cross charges. The AO has failed to take cognizance of the fact that the reimbursements are made on cost-to-cost basis. The AO has also made references to various other provisions of the Act without analyzing whether the ESOP cross-charges includes any income element, which is taxable under the Act. 34.34 Further, the case laws relied upon by the Learned AO are very different on facts and not applicable in the context of the Company. 34.35 The ESOP expenditure incurred is a compensation/incentive to the employee and has direct nexus with his/her employment. Such compensation to the employees in the form of ESOP are included in salary of the employees under Section 17 of the Act. Therefore....
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....ees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. 19. In the present case, there is no dispute that the liability has accrued to the assessee during the previous year. The only question to be decided is as to whether it is the expenditure of the assessee or that of the parent company. We are of the view that the observations of the CIT(A) in para 5.6 of his order that these expenses are the expenses of the foreign parent company is without any basis and lie in the realm of surmises. The foreign parent company has a policy of offering ESOP to its employees to attract the best talent as its work force. In pursuance of this policy of the foreign parent company, allowed its subsidiaries/affiliates across the world to issue its shares to the employees. As far as the assessee in the present case which is an affiliate of the foreign parent company is concerned, the shares were in fact acquired by the assessee from the parent company and there was an actual outflow of cash from the assessee to the foreign parent company. The pri....
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....n his order. There is no basis to apply the provisions of Sec.40A(2)(b) of the Act. 22. With regard to the decision of the ITAT in the case of Accenture (supra), we find that the facts of the case of Accenture (supra) are identical. In the case of Accenture (supra), the facts were that the assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed Rs. 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not assessee. The CIT(A) deleted the addition made by the AO. The CIT(A) found that the common shares of Accenture Ltd. the parent company, have been allotted to the employees of ASPL, the Indian affiliate/Assessee and not to the employees of the parent company. The CIT(A) also found that though the shares of the parent company have been allotted, the same have been given to the employees of the Assessee at the behest of the Assessee. The CIT(A) thus held that it was an expense incurred by the a....
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....enue expenditure. 25. For the reasons given above, we direct the expenditure be allowed as deduction." 36.1. Further, the Tribunal in the case of Global e-Business Operations (P) Ltd. in IT(TP)A No.212/Bang/2021 dated 27.09.2022 has held as under:- "20. We have heard rival submissions and perused the material on record. In assessee's group case, namely, EIT Services India Pvt. Ltd. v. DCIT (supra), had held that the ESOP expenditure is to be allowed as a deduction u/s 37 of the I.T.Act. The Tribunal had followed the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Biocon Limited (supra). The relevant finding of the Tribunal in assessee's group case, reads as follows:- "20.27 We have heard the rival submissions and perused the materials available on record. This issue came up for considerat ion before the Hon'ble Karnataka High Court in the case of CIT Vs. Biocon Ltd. cited (supra) wherein it was held as under:- "From a perusal of section 37(1) of the Income-tax Act, 1961 it is evident that the provision permits deduction of expenditure laid out or expended and does not contain a requirement that there has to be a payout.....