AI Drafter 
TaxTMI 
TaxTMI 
2022 (12) TMI 995
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.... IT enabled services rendered by the Appellant to its Associated Enterprises ("AEs"); 2. The learned CIT (A) has erred in law and facts, by not accepting the Appellant's plea in entirety and upholding the action of the learned AO/TPO of rejection of transfer pricing documentation ["TP Documentation"] including economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income tax Rules, 1962 ("the Rules") by erroneously invoking provision of section 92C(3)(a) and (c) of the Act without providing cogent reasons; 3. The learned CIT(A) has erred in law and facts, by upholding the action of the learned TPO/A0 of disregarding certain comparable companies selected by the Appellant in the TP Documentation and instead conducted fresh search and thereby erroneously selected additional comparable companies for determination of the arm's length price in connection with the impugned international transactions and holding that the international transactions entered into by the Appellant are not at arm's length; 4. The learned CIT(A) has erred in law and facts, by upholding action of the learned AO/TPO of rejecti....
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....ware development services: a. Larsen & Toubro Infotech Limited b. Persistent Systems Limited 8.2 The learned AO/learned TPO/Hon'ble CIT(A) has grossly erred in rejecting the following companies that ought to have been included as comparables for software development services: a. Akshay Software Technologies Ltd b. CAT Technologies Limited c. Helios and Matheson Information Technology Ltd. d. Maveric Systems Ltd. e. Silverline Technologies Ltd. f. Cherrytec Intellisolve Pvt. Ltd. g. Techsoft Engineering Projects Ltd. h. Kals Information Systems Ltd. i. Evoke Technologies Pvt. Ltd. 9. IT Enabled Services: 9.1 The learned AO/learned TPO/Hon'ble CIT(A) has grossly erred in rejecting the following companies that ought to have been included as comparables for IT Enabled services: a. ICRA Online Limited b. Techprocess Solutions Limited c. Cameo Corporate Services Private Limited d. Crystal Voxx Limited 9.2 The learned AO/ learned TPO/ Hon'ble CIT(A) erred in accepting companies that ought to have been rejecte....
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....al High Court decision is binding on subordinate authorities even if appeal against such High Court decision is pending before Apex Court. 12. Disallowance of software expenses under section 40(a)(i) - INR 1,48,09,404 12.1 The learned AO/CIT(A) has erred in disallowing software expense amounting to INR 1,48,09,404 for nondeduction of tax at source ("TDS"). 12.2 The learned AO/CIT(A) ought to have observed that on the said expense, no TDS was required to be deducted as per the tax treaty of India with the respective countries of the payees. 12.3 Notwithstanding and without prejudice to the above, the learned AO/CIT(A) ought to have appreciated that an expense cannot be disallowed under section 40(a) when TDS liability on such expenses has arisen due to retrospective amendment. 12.4 Notwithstanding and without prejudice to the above, the learned AO/CIT(A) ought to have appreciated that out of the total expense of INR 1,48,09,404 a sum of INR 45,48,965 relates to hardware support and technical services which are not subject to tax based on the tax treaties with the respective countries of payees. 12.5 Notwithstanding and without pr....
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....me qualifying all the qualitative and quantitative filters applied by the TPO. 5. The Ld. CIT(A) erred in disregarding the position of law that there could e difference between the enterprises compared under the TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises. 6. The Ld. CIT(A) erred in fact and in law in seeking exact comparability while searching for comparable companies of the assessee company under TNMM whereas the requirement of law and international jurisprudence require seeking similar comparable companies. 7. The Ld. CIT (A) erred in deleting the addition made on account of belated remittance of PF/ESI by the assessee on the basis of jurisdictional High Court's judgment in the case CIT Vs Sabri Enterprises, even though the issue has not reached finality as the revenue's SLPs are pending before the Hon'ble Apex Court on the said issue. 8. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the Ld. CIT (A) be reversed and that of the Assessing Officer be restored. 9. The appellant crave....
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....The Ld.AR, thus prayed for the admission of additional grounds so raised by assessee. 4.1 On the contrary, the Ld.CIT.DR though opposed admission of the additional ground, could not bring anything on record which would challenge such a right available to assessee under the Act. 4.2 We have perused the submissions advanced by both sides in light of records placed before us. 4.3 The Ld.DR did not object for the additional grounds being admitted. 4.4 We note that one of the additional grounds is directly connected with the main issue of disallowance and no new facts needs to be investigated for adjudicating the same. Another issues alleged by the assessee is a legal issue that does not require investigation of any facts. 4.5 Considering the submissions and respectfully following the decisions of Hon'ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional ground raised by the assessee. Accordingly, the application for raising additional grounds stands allowed for the year under consideration. Accordingly additional grounds rai....
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....of the comparables selected by the assessee was at 9.19% for SWD segment and 13.96% for ITES segment, it held the international transaction to be at arms length. 5.6 The Ld.TPO dissatisfied with the comparables selected by the assessee applied various filters and finalised following comparables under the two segments: SWD Segment: Sl.No. Company Name Adjusted Margins FY 2011-12 1 Datamatics Global Services Ltd. 22.83% 2 Genesys International Corpn. Ltd. 33.45% 3 ICRA Techno Analytics Ltd. 24.05% 4 Infosys Ltd. 49.67% 5 Larsen & Toubro Infotech Ltd. 33.52% 6 Mindtree Ltd. 22.79% 7 Persistent Systems Ltd. 34.89% 8 R S Software (India) Ltd. 25.59% 9 Sasken CommunicationTechnologies Ltd. 21.24% 10 Spry Resources India Pvt Ltd. 19.01% AVERAGE 28.71% ITES Segment: SI.No. Company Name Adjusted Margins FY 2011-12 1. Accentia Technologies Ltd. 8.19% 2. Universal Print Systems Ltd. 53.61% 3. Informed Technologies India Ltd. 5.50% 4. Infosys BPO Ltd. 32.22% 5. Jindal intellicom Ltd. - 0.48% 6. Microgenetic Syste....
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....ion under Sec. 10AA - Ground No. 11 • Disallowance of Software Expenses under Sec. 40(a)(i) Ground No. 12 7. Based on the above submissions of the assessee, we restrict our opinion in respect of the above grounds. All other grounds that has not been argued by the Ld.AR are dismissed as not pressed. 8. Ground no. 7 - The Ld.AR submitted that ground no. 7 as well as Ground no. 7.1 raised by the assessee in application dated 26.07.2019 is in respect of the working capital adjustment that is not computed in accordance with law. 8.1 It is submitted that, the assessee is a captive unit, that provides services to its AE. The Ld.AR submitted that, the assessee is reimbursed on cost plus markup, and assumes minimal risk associated with the business. He thus submitted that (-)ve working capital, therefore cannot be computed under the SWD services segment, and that, the working capital on actual has to be granted to the assessee, in order to eliminate material differences, if any, with that of the comparables. In support of this argument, he placed reliance on the decision of Coordinate Bench of this Tribunal in case of e4e Business Solutions India Pvt. Ltd. in IT(TP)A N....
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....n these decisions that under TNM method that every ingredient of profit margins of comparable companies are analysed, whether it is positive or negative. The decision proceeds on the basis of effect on price owing to working capital requirement. We are of the view that working capital adjustment itself is computed on the basis of outstanding current assets and liabilities at the year end. It means that other things being equal, an entity having higher working capital will incur more interest cost which will reduce profitability. Hence no importance shall be given to pricing aspect. Since the assessee does not have any working capital risk, the question of negative working capital does not arise." 8.6 We therefore respectfully following the above view, direct the Ld.TPO to delete the (-)ve Working Capital Adjustment computed under the software development segment. 8.7 In respect of the Working Capital Adjustment computed under ITES segment, we direct the Ld.TPO to compute the working capital on actuals. Assessee is directed to provide all necessary details for both the segments in order to compute the Working Capital Adjustment on actuals by the Ld.TPO. Accordingly ground n....
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....essee under both the segments is a risk mitigated company and except for foreign exchange fluctuation risk, service liability risk (ITES segment), it does not bear any significant risk in rendering the services to its AE. Characterisation Assessee being a capital service provider that assumes minimal risk associated the business carried under both the segments. Based on the above, we shall analyse the comparables sought for inclusion and exclusion by the assessee. 9.2 Ground no. 8.1 - Assessee seeks exclusion on following comparables under SWD services segment. a) Larsen & Toubro Infotech Ltd. b) Persistent Systems Ltd. In the additional ground raised by assessee following comparables are sought for exclusion. 9.3 Further assessee was inclined to seek exclusion of only two comparables, that are alleged for exclusion in the Additional ground 8.3 which are as under: a) Genesys International Services Ltd. b) Infosys Ltd. 9.4 The Ld.AR submitted that the comparability of all the above four comparables sought for exclusion were considered by Coordinate Bench of this Tribunal in case of Agilis Information Technologies India (P.) Ltd. ....
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....t and sale of software products and also owns intangible assets and therefore not comparable with a software development service provider such as the Assessee in that case. (b) Larsent & Tourbro Infotech Ltd., was excluded from the list of comparable companies by relying on the decision of the Delhi Bench of ITAT in the case of Saxo India (P.) Ltd. v. Asstt. CIT [2016] 67 taxmann,com 155 (Delhi - Trib.). The discussion is contained in paragraphs 4.8 to 4.10 of the Tribunal's order. The Tribunal held that L & T Infotech Ltd., was a software product company and segmental information on SWD services was not available. The Tribunal also noticed that the appeal filed by the revenue against the tribunal's order was dismissed by the Hon'ble Delhi High Court in ITA No.682/2016. (c) Persistent Systems Ltd., was excluded from the list of comparable companies on the ground that this company was a software product company and segmental information on SWD services was not available. The Tribunal in coming to the above conclusion referred to the decision rendered by ITAT Delhi Bench in the case of Cash Edge India (P) Ltd. v. ITO ITA No.64/De1/2015 order dated 23.9.2....
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.... services and therefore there is no requirement of segmental reporting. It was also submitted that this company owns substantial intangibles equivalent to 10.42% of its total turnover. 32. The TPO however has regarded this company as a comparable company by observing that this company develops software for mapping and geospatial services and operates a few development centres in India. The company is predominantly into software development services. The intangibles in the possession of the company are only the GIS database which is only depreciation. It does not add significant value to the company. 33. The objections as put forth before the TPO were reiterated before the DRP. The DRP in paragraphs 6.2.2 & 6.2.3 of its directions dealt with this issue as follows: "6.2.2 The functions of the Assessee company have been examined in detail. A financial product on which the settlement system of bank runs is a real time system. It is very complex. Any bug or problem in it can crash the entire banking system of several nations. The Assessee's claim of providing only basic software services is rejected. 6.2.3 The Panel holds that the software for financial product is ....
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....hing contrary has been brought to our notice by the Ld.DR in order to deviate from the above view. Respectfully following the same, we direct the Ld.TPO to exclude the following comparables. • Genesys International Services Ltd. • Infosys Ltd. • Larsen & Toubro Infotech Ltd. • Persistent Systems Ltd. 9.10 Ground no. 9.2 raised by assessee is in respect of exclusion of following comparables under ITES segment. • Infosys BPO Ltd. • Excel Infoways Ltd. 9.11 The Ld.AR further submitted that Coordinate Bench of this Tribunal in case of CGI Information Systems & Management Consultants (P.) Ltd. (supra) has excluded the above comparables. Under similar circumstances, the Ld.DR relied on orders passed by Ld.CIT(A). 9.12 We have perused the submissions advanced by both sides in the light of records placed before us. 9.13 We note that Coordinate Bench of this Tribunal in case of CGI Information Systems & Management Consultants (P.) Ltd. (supra) observed as under: "45. We have considered the rival submissions. In the case of Baxter (I) (P) Ltd., (supra) the Delhi ITAT Bench considered comparabil....
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....software expenses paid to non-residents. The Ld.AO disallowed the above expenses under section 40(a) (i) of the Act for non-deduction of tax. The Ld.AO held that the payments made by the assessee were towards right to use, and the same would be classified as 'royalty', both under the Act and under the respective tax treaties of the payee's. 11.1 The Ld.AO disallowed the expenses by relying on the decision of Hon'ble Karnataka High Court in case of Samsung Electronics Co. Ltd. reported in (2011) 203 taxman 477. The Ld.AR submitted that this decision has been reversed by Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. reported in [2021] 125 taxmann.com 42 (SC), we direct the Ld.AO/TPO to verify the invoices raised against which the payments were made by assessee in the light of principles laid down by Hon'ble Supreme Court in the above referred case. The Ld.AO is directed to consider the claim in accordance with law by granting appropriate opportunity of being heard to assessee. Accordingly this ground raised by assessee stands allowed for statistical purposes. 12. Ground nos. 13-14 are consequential in nature and therefore do not....