TaxTMI 
TaxTMI 
2020 (10) TMI 1346
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....directions issued by the Hon'ble Dispute Resolution Panel ['DRP' / Panel'], is bad in law and on facts and is in violation of the principles of natural justice. b) The AO has erred in law in making a reference to the learned Assistant Commissioner of Income Tax [Transfer Pricing (2)(1)(1)] ['TPO']. The Ld. Panel erred in upholding the actions of the Ld. AO/ TPO. c) The directions issued by the Ld. Panel did not take cognizance of the objections raised by the Appellant in relation to the transfer pricing matters while issuing the directions under Section 144C(5). d) The directions issued by the Ld. Panel and the order passed by the Ld. AO is without jurisdiction, inter alia, in so far as it purports to give effect to an invalid order of the Ld. TPO e) On the facts and in the circumstances of the case and in law, Ld. AO/ TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside India by manipulating the prices charged in the international transaction, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. The Ld. Panel also erred in confirming the same." 2. Comparability An....
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.... 15% of sales. f) The Ld. AO/ TPO erred in including Infosys Limited, Larsen & Toubro Infotech Limited, Mindtree Limited, Persistent Systems Ltd, R S Software (India) Limited, Cigniti Technologies Ltd and Thirdware Solutions Ltd as comparable, despite these companies being functionally dissimilar to the Appellant. The Ld. Panel also erred in confirming the same. g) The Ld. AO/ TPO erred in rejecting following companies from its own search which are otherwise functionally comparable and pass all the filters applied in the transfer pricing order: * Infomile Technologies Limited; * Sagarsoft India Limited; and * Maveric Systems Ltd. The Ld. Panel failed to adjudicate the aforesaid contentions of the Appellant. h) The Ld. AO/TPO erred in considering data obtained u/s 133(6). The Ld. Panel erred in confirming the same. i) The Ld. AO/ TPO also erred in treating provisions for doubtful debts as non-operating in nature while calculating the net margins of the comparable companies. The Ld. Panel also erred in confirming the same. j) The Ld. AO/ TPO erred in treating gain on account of foreign exchange fluctuation as non-operating in nature and thereby computing the tested ....
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....in pending before Hon'ble 1TAT for earlier years, the DRP has erred in dismissing the same and not adjudicating on merit basis. c) Without prejudice to the above, the Ld. AO and the Hon'ble DRP has failed to take cognizance of the fact that the assets taken on lease do not include only leasehold improvements but also include furniture and office equipments which are depreciable at 10% and 15% respectively. However, the Ld. AO has erred in providing depreciation at the rate of 10% only considering that all the assets taken on lease are lease hold improvements. 8. Non grant of TDS Credit The learned DCIT erred in granting TDS credit of Rs. 2,160,691 as against Rs. 2,162,489 as claimed in the return of income, resulting in a short grant of TDS credit to the tune of Rs. 1,798. 9. Non grant of MAT credit entitlement The Ld. AO has erred in law and facts in not considering the carried forward Minimum Alternate Tax ('MAT') credit balance against the taxes determined as payable under the normal provision of the Act in the assessment order. 10. Excess levy of interest under section 234B of the Act The Ld. AO has erred in levying interest under ....
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....P) in respect of an international transaction of rendering software development [SWD] services by the assessee to LSI Corporation, USA which is an Associate Enterprise [AE]. On the issue of determination of ALP, the Assessee mainly reiterated its stand as put forth before the revenue authorities and the learned DR relied on the order of the AO/TPO and the DRP. 7. The assessee rendered SWD services to its AE for which assessee received a sum of Rs.624,64,83,200. It is not in dispute that the transaction of rendering SWD services to its AE was an international transaction and the arm's length price [ALP] in respect of such transaction has to be determined having regard to the arm's length test as laid down in section 92 of the Act. 8. The assessee in support of its claim that the consideration received in the international transaction was at arm's length, filed a TP analysis in which it adopted Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determination of ALP. The Assessee adopted Operating Cost to Total Cost (OP/OC) as Profit Level Indicator [PLI] for the purpose of comparison of assessee's operating margin with profit margin of comparable companie....
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....TPO accepted 2 out of 6 comparable companies chosen by the assessee, viz., Mindtree Ltd. and R S Software India Ltd. 11. The TPO on his own chose 6 other comparables and computed the ALP of the international transaction and the consequent addition to be made to total income as follows:- Comparables selected by TPO and their arithmetic mean Sl.No. Name of the Company OP/OC (WC-unadj) (in %) 1 Infosys Ltd. 36.13 2 Larsen & Toubro Infotech Ltd. 24.61 3 Mindtree Ltd. 20.43 4 Persistent Systems Ltd. 35.10 5 R S Software (India) Ltd. 24.25 6 Cigniti Technologies Ltd. 27.62 7 SQS India BFSI Ltd. 22.37 8 Thirdware Solution Ltd. 44.68 AVERAGE MARK-UP 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. 552,23,74,800/- Arm's Length Price @129.40% of cost Rs. 714,59,52,991/- Price Received Rs. 638,14,21,153/- Shortfall being adjustment u/s. 92CA Rs. 76,45,31,838/- 12. Thus, a sum of Rs.76,45,31,838 was suggested as addition to total income of assessee on determination of ALP by the TPO. The addition suggested by the TPO in the order passed u/s. 92C....
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....sp;5,380,202,798 Operating Profit (C = A - B) 866,280,402 NCP (%) 16.10% Facts, if any, modified by the Assessing Officer Further, the Ld. TPO without taking the cognizance of the detailed submission filed on 9 October 2017, has passed the order and computed the margin of the Assessee as below: Particulars Amount in Rupees (as per TP Study) Revenue from Operations Other income Less: Interest Income Less: Foreign Exchange Gain 6,408,596,457 167,456,407 - 140,281,103 Total Income (A) 6,381,421,153 Employee Benefit Expenses Depreciation & Amortisation Other expenses Less: Provision for doubtful advances Less: Advances written off Less: Foreign Exchange gain 3,710,843,964 609,928,724 1,203,414,977 1,812,865 - - Total Expenditure (B) 5,522,374,800 Operating Profit (C = A - B) 859,046,353 NCP (%) 15.56% The Ld. TPO computed the NCP of LSI India as 15.56% on account of following erroneous adjustments: * Other income being doubly included in the operating income (i.e. first as part of the revenue from operations thereby considering revenue from operations to be Rs.6,408,596,457/- ins....
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....14. The AO passed final order of assessment incorporating the directions of DRP. Aggrieved, the assessee has preferred the present appeal before the Tribunal. 15. In this appeal, the assessee seeks exclusion of 5 out of 7 comparable companies that remain after the order of DRP viz., (1)Infosys Ltd. (2) Larsen & Toubro Infotech Ltd. (3) Persistent Systems Ltd. (4) Cigniti Technologies Ltd. & (5) Thirdware Solutions Ltd. 16. As far as the challenge by the assessee on exclusion of aforesaid 5 companies in ground No.2(f), the ld. counsel for the assessee has brought to our notice a decision of Bangalore Bench of ITAT for the very same Assessment Year 2014-15 in the case of LG Soft India Pvt. Ltd. in IT(TP)A No.3122/Bang/2018 for AY 2014-15, order dated 28.5.2019. In this order rendered in a case of assessee rendering SWD services such as the assessee, the Tribunal excluded 3 out of 5 companies referred to in the earlier paragraph and remanded 1 company for fresh consideration with the following observations:- "5. The Ld A.R submitted that M/s Infosys Ltd, M/s Persistent Systems Ltd and M/s Thirdware Solutions Ltd have been excluded by the co-ordinate bench in the assessee's own cas....
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....gies Ltd is a Testing company and hence it cannot be considered as a comparable. However, we notice that this contention has been raised by the assessee for the first time before Ld DRP and there was no occasion for the TPO to examine the same. Accordingly we restore this comparable to the file of AO/TPO for examining it afresh." 17. As far as exclusion of Larsen & Toubro Infotech Ltd., is concerned, the Tribunal in the very same case of M/s. LG Soft Pvt. Ltd. (supra) in another order dated 27.9.2019 in MP No.95/Bang/2019 held that exclusion of Larsen & Toubro Infotech Ltd., was omitted to be adjudicated in the original order dated 28.5.2019 passed by the Tribunal referred in the earlier paragraph and held that Larsen & Toubro Infotech Ltd., is also not a comparable company because there were extraordinary events that occurred in the relevant previous year and that it possessed brand and intangibles and there was no segmental information of sub-contracting expenses. 18. Respectfully following the aforesaid decision, we direct exclusion of (1) Infosys Ltd. (2) Larsen & Toubro Infotech Ltd. (3) Persistent Systems Ltd. & (4) Thirdware Solutions Ltd. from the list of comparable compa....
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....Paper Book, found that major revenues are from operations as per Note 19 being income from software services and commission received on sale of software licenses. The earnings as per Note 28 as per the financial statements, the company has earning from export of software and in the F.Y. 2013-14 which constitute more than 95% of income. Therefore we found these facts are not considered by the TPO or DRP and accordingly we restore this issue to the file of TPO for examination and verification." 23. We are of the view that the issue of comparability of Akshay Software Ltd. should be examined afresh by the TPO as per the directions of the Tribunal in the order referred to above. We hold and direct accordingly. 24. As far as inclusion of Infomile Technologies Ltd., Sagarsoft India Ltd. and Maveric Systems Ltd. are concerned, we find that inclusion of Maveric Systems Ltd. was remanded by the Tribunal to the TPO for consideration afresh in the case of EMC Software & Services India P. Ltd. (supra) with the following observations:- "(iii) Maveric Systems Limited : This comparable was rejected by the TPO and it was sought for inclusion by the assessee and whereas TPO has rejected without....
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....in the public domain and consider the comparability of this company for inclusion, after affording opportunity of being heard to the assessee. 29. In ground No.2(j), the limited challenge by the assessee is in respect of the action of the revenue authorities in not treating the gain on account of foreign exchange fluctuation as operating income. As far as the issue with regard to treatment of foreign exchange gain as part of operating profit is concerned,, this issue is no longer res integra and has been settled by the decision of the Bangalore Bench of ITAT in the case of e4e Business Solutions P. Ltd. v. DCIT [2016] 67 taxmann.com 68 [Bang. Trib.]. It has been held therein that the gains arising from fluctuation of foreign exchange having nexus with international transaction should be treated as operating income and taken into consideration while computing the operating profit of the assessee. Following the aforesaid decision, we direct the computation of PLI by treating the gains arising from fluctuation of foreign exchange having nexus with international transaction as part of operating income. 30. No other arguments were advanced on grounds No.1 to 5. Accordingly these groun....
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....than 180 days, and therefore no adjustment is warranted. Detailed submissions in this regard are at pages 526-530 and 879-888 of the paperbook. He placed reliance on the decision of the ITAT Bangalore Bench, in the case of Avnet India (P.) Ltd. v. DCIT (reported in [2016] 65 taxmann.com 187 (BangaloreTrib), wherein it was held that transaction of providing extended period of credit to an AE constitutes an international transaction u/s 92B of the Act. However, this transaction is not an independent transaction. It is an integral part of transaction of sale made to the AE and therefore, it has to be considered along with the main transaction. 34. It was further contended that that the Delhi Bench of ITAT in the case of Kusum Healthcare Pvt. Ltd. v. ACIT (Order dated 31.03.2015 passed by the Delhi Bench of the Hon'ble Tribunal in ITA No. 6814/Del/2014) held that if the working capital investment of the assessee and the comparables rather are considered than looking at the receivable independently is not necessary as the working capital adjustment takes into account the impact of outstanding receivables on the profitability. It was pointed out that this decision came to be upheld by t....
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....(Bangalore-Trib) (refer para 13) (vi) Och-Ziff Real Estate India (P.) Ltd. v. DCIT [2017] 86 taxmann.com 190 (Bangalore-Trib) (refer para 12) (vii)Sunquest Information Systems India (P.) Ltd. v. DCIT [2019] 101 taxmann.com 315 (Bangalore-Trib) (refer para 24) In view of the above, it is submitted that the delayed receivables cannot be treated as an independent international transaction 36. Without prejudice to the above submissions, it was contended that even assuming that delayed realization of trade receivables is an international transaction, the delay in realization of the trade receivables in this case is not inordinate so as to warrant any benefit provided to the AE warranting determination of ALP. Our attention was drawn to the fact that the average realization period of the trade receivables is 66.77 days as per the calculation given to the DRP which is given as an Annexure-1 to this order. It was contended that since the period of credit is not unusually high, no addition is warranted. The ld. DR relied on the order of the DRP. 37. We have carefully considered the rival submissions. On the question whether delayed realization of trade receivables from the AE constit....
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..... Setting aside the view taken by the Tribunal, the Hon'ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment. 39. In the case of BT e Serv (TS-849-ITAT-2017(DEL)-TP) the ITAT Delhi Bench held that undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f. 01.04.2002 inserted by the Finance Act 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an "international transaction". The natural corollary would be of imputing interest on such "capital financing" if same is not charged at arm's length. The ITAT concluded that if outstanding receivables are within the terms of agreement, then it may be argued that interest on such outstanding is already covered in the sale price of the goods. However, if the agreement does not specify the term of the payment, even then assessee must be given benefit of credit period which is accepted business practice ....
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....in its books of accounts, the Assessee had capitalised the payments made towards principal component of the rent and claimed depreciation on the same. However, since the assets were taken only on rent under the rental agreement and the Assessee did not have any title/ownership to the same, while computing its income for tax purposes, the Assessee claimed deduction of the entire amount paid towards the rent. Depreciation claimed in the books was disallowed while computing the taxable income. The Assessing Officer disallowed the amount paid towards the principal and capitalised the same. Consequent depreciation at the rate of 10% was allowed. The DRP rejected the objections of the Assessee and upheld the order of the Assessing Officer on the ground that the risk of the assets falls entirely on the Assessee and the Assessee is permitted to sell the same with the consent of the lessor. 43. Before the Tribunal, the learned counsel for the Assessee submitted that the orders of the lower authorities are erroneous. It was submitted that in order to determine whether the Assessee is the owner of the assets, it is pertinent to examine the relevant clauses in the agreement under which the as....