TaxTMI 
TaxTMI 
2020 (10) TMI 1346
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....on 143(3) read with section 144C (1 ), pursuant to the 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....
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....isregarding the Appellant's ground for application of the related party transaction filter at a threshold of 10% or 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 er....
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....ation ic4 10% thereby leading to the net disallowance of Rs. 60,595,235. b) On facts and circumstances of the case, though the Appellant has erroneously conceded and misconceived the issue as covered matter, wherein it in fact meant to submit that the same issue 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....
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.... case of companies providing software development services such as the assessee, inclusion of the aforesaid company as a comparable has always been an issue. In these circumstances, we admit the additional ground for adjudication. 6. Ground Nos.1 to 5 raised by the assessee in the grounds of appeal are with regard to determination of Arm's Length Price (ALP) 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 ....
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....he Assessee and as computed by the TPO. 10. The assessee chose 6 comparable companies and the average arithmetic mean profit margin of those 6 companies were 13.32%. Since the profit margin of the comparable companies was less than the profit margin earned by the assessee from the international transaction, the assessee claimed that the price receive in the international transaction was at arm's length. The 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 ....
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....culars Amount in Rupees (as per TP Study) Revenue from Operations Other income Less: Interest Income Less: Foreign Exchange Gain 6,241,140,050 167,456,407 21,832,154 140,281,103 Total Income (A) 6,246,483,200 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 1,890,899 140,281,103 Total Expenditure (B) 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....
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.... 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) 724,108,400 NCP (%) 13.11% As per the above computation the margin of the assessee comes to 13.11%. This is mainly due to the error is taking other income twice. This results in enhancement of the adjustment. Since the assessee voluntarily admitted this error of the TPO in its grounds and sought amendment the same is conceded and opportunity for enhancement is deemed to have been given. Accordingly, the AO/TPO is directed to adopt the revised margin of the assessee as above. Ground rejected." 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(....
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....that M/s Thirdware solutions Ltd is engaged in product development and earns revenue from sale of licenses and subscription. Further, the segmental details were not available. 8.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Thirdware Solutions Ltd. 9. We have noticed that the assessee seeks exclusion of M/s Cigniti Technologies Ltd. It is pertinent to note that the assessee itself had selected this company as a comparable and it has urged for exclusion of the same only before Ld DRP. The Ld A.R submitted that the Ld DRP did not address the same. The Ld A.R submitted that M/s Cigniti Technologies 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....
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....nded to the TPO for consideration afresh in the case cited by the ld. counsel for the assessee. Following were the relevant observations of the Tribunal:- "(i) Akshay Software Ltd. which has a margin of 8.13%. The income from commission on sale of software license constitute meager 0.5% of total revenue and TPO has not applied transfer development filter. The said company was rejected by the TPO for the reason that the company is engaged in providing provisional services, procurement installation, employment support of ERP products. The DRP has rejected the comparable without applying the filter and there is no difference in the business model adopted by the company and the assessee. We on perusal of the Annual Report at Page 1373 of 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 ....
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....closure of RPT in the annual report, it has to be concluded that there was no RPT and therefore this company should be included as a comparable company. Following the aforesaid decision, we direct inclusion of I2T2 India Ltd. as comparable company. 28. As far as inclusion of Evoke Technologies Ltd. is concerned, the reasons given for non-inclusion was that data relating to this company was not available in the public domain. The ld. counsel for the assessee brought to our notice that the data is now available in the public domain, therefore the TPO may be directed to consider the comparability of this company afresh in the light of data available in the public domain. We accept the request made in this regard and direct the TPO to consider the data available 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....
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....ted with the said transaction and adjustment ought to be computed accordingly. Reliance in this regard was placed on the decision of this Hon'ble Tribunal in the case of Avnet India (P.) Ltd. v. DCIT (reported in [2016] 65 taxmann.com 187 [Bangalore - Trib.)] which was upheld by the Hon'ble High Court of Karnataka in ITA No. 358/2016. In any event, it was submitted that the Assessee has substantial own funds and has not incurred any additional cost on account of the delayed receivables, warranting a TP Adjustment. It was pointed out that the Assessee has not taken any loans to fund its working capital requirement, and therefore an adjustment towards outstanding receivables is not warranted. Further, it was submitted that the receivables have remained outstanding for less 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 internati....
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....y on the basis of the outstanding receivables would have distorted the picture and recharacterised the transaction." 35. It was argued that the above principles have been followed consistently by this Hon'ble Tribunal inter alia in the following cases: (i) ACIT v. Information Systems Resource Centre (P.) Ltd. (2015) 59 taxmann.com 147 (Mumbai-Trib.) (refer paras 11-13) (ii) Bechtel India Pvt. Ltd. v. DCIT (Order dated 21.12.2015 passed by the Delhi Bench of the Hon'ble Tribunal in ITA No. 1478/Del/2015) (refer para 16) (iii) Tally Solutions (P.) Ltd. v. ACIT (2016) 73 taxmann.com 70 (Bangalore-Trib) (refer para 5 9) (iv) Xchanging Solutions Ltd. v. DCIT [2017] 78 taxmann.com 54 (Bangalore-Trib) (refer para 23) (v) ACIT v. Millipore (India) Ltd. [2017] 80 taxmann.com 12 (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 ....
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....nterest gets subsumed in the working capital adjustment. The Hon`ble Bombay High court in the case of CIT vs. Patni Computer Systems Ltd, (2013) 215 Taxman 108 (Bom) dealt, inter alia, with the following 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 the Income-tax Act, 1961 refers to any Other transaction having a bearing on the profits, income, losses or assets of such enterprises?" While answering the above question, the Hon'ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. 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....
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....ssue requires to be decided afresh and hence the same is remanded to the AO/TPO to give a factual finding on the aspect what constitutes normal credit period and what is extended credit period that warrants conclusion that there has been a separate international transaction of providing deferred payment facility to the AE. Consequently, the issue is remanded to the AO/TPO for consideration afresh in the light of the above discussion after affording opportunity of being heard to the Assessee. 42. We shall now take up for consideration the other corporate tax issues. Ground No.7 raised by the assessee is with regard to disallowance of finance lease purchase. The facts in this regard are during the financial year under consideration, the Assessee had made some payments towards certain assets taken on lease from Rentworks India Pvt. Ltd. In order to comply with the Accounting Standards AS-19 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....
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....e assets and as it was not the owner of the asset, it is entitled to claim deduction of the rental amount. It was submitted that the bifurcation of the payment for treatment in terms of Accounting Standards-19 cannot be the sole factor to determine whether the Assessee is the owner of the asset and consequently not eligible to claim deduction of the rental payments. Reliance in this regard was placed on the decision of the Delhi Bench of the Tribunal in the case of Bharti Hexacom Ltd. v. ACIT (reported in [2016] 68 taxmann.com 357 (Delhi - Trib.). Further reliance was also placed on the decision of the Hon'ble Supreme Court in the case of ICDS Ltd. v. CIT (reported in [2013] 350 ITR 527 (SC). Reliance is also placed on the decisions of the Hon'ble Supreme Court in the case of Taparia Tools Ltd. v. JCIT ([2015] 55 taxmann.com 361 (SC) and Hon'ble Karnataka High Court in the case of Karnataka Bank Ltd. v. ACIT ([2013] 34 taxmann.com 150 (Karnataka), wherein the Courts have held that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act. Therefore, it was submitted that since the Assess....