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TaxTMI 
TaxTMI 
TaxTMI 
2020 (10) TMI 1354
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....g Support Services ('MSS") to its Associated Enterprises (AEs) i.e. Microsoft Corporation and Microsoft Operations Pvt. Ltd., Singapore. It also provides Microsoft Consultancy Services and Product Support Services. For the provisions of these services, the assessee is remunerated on cost plus 15 % by the AEs. 2.1 The return of income for the captioned year was filed declaring a total income of Rs.20,63,87,027/- after claiming deduction u/s 80G amounting to Rs.1,08,62,475/-. Subsequently, the assessee revised the return of income disclosing total income at Rs.20,81,82,464/-. Since, the assessee had entered into international transactions during the year under consideration, a reference was made to the Transfer Pricing Officer (TPO) and the TPO passed the order u/s 92CA (3) of the Income Tax Act, 1961 (hereinafter called 'the Act') proposing an adjustment of Rs.58,49,85,516/- on account of difference in Arm's Length Price (ALP). The summary of adjustments proposed by the TPO is as under: (i) Marketing Support Services- Rs.53,68,71,251/- (ii) Management Consulting Services and Project Consulting Services - Rs.4,81,14,265/- 2.2 The draft assessment order was passed computing th....
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....Ld. TPO/AO have erred by not following the principle of consistency while determining the arm's length price ("ALP") of the impugned transaction by ignoring the fact that no transfer pricing adjustment has been made for impugned transactions in past years and neither the functional profile of Appellant nor the methodology adopted by the Appellant to benchmark the same has changed from past years. 5. That on facts and in law, the Hon'ble DRP and the Ld. TPO/AO have erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the IT Rules, and conducting a fresh economic analysis for the determination of the ALP for the impugned transaction and holding that it is not at an arm's length. 6. That on facts and in law, the Ld. AO/TPO/DRP have erred by 6.1 Using single year data of companies to determine the arm's length price of the impugned transaction and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price; and 6.2 Rejecting the data used by the Appellant which was available to it at the relevant time and proceeding to use the data which was available only at....
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.... Ld. DRP and Ld. AO have erred in disallowing 50% of running and maintenance expenditure amounting to INR 22,450,124 on ad hoc basis with respect to the vehicles that were used by its employees for the purpose of the business of the Appellant. 14.1 That on the facts and circumstances of the case and in law, the Ld. DRP and Ld. AO have erred in disregarding the fact that reimbursement by the Appellant to employees on account of running and maintenance expenditure is an actual expenditure incurred by the Appellant wholly and exclusively for the purpose of its business. 14.2 That on the facts and circumstances of the case and in law, the Ld. DRP and Ld. AO have erred in disregarding the submission made by the Appellant and in stating that no specific argument has been extended for justifying the claim to be wholly and exclusively for the business purposes. 15. That on facts and in law, the Hon'ble DRP has erred in not granting the relief in respect of excess income of INR 25,453,475 offered for taxation in the subject year erroneously on account of automatic reversal of year end provisions in the accounting system of Appellant. 15.1 That on the facts of case and in circums....
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....eduction u/s 43B of the Act amounting to Rs. 70 crores is allowed, the income of the assessee would be correspondingly enhanced by Rs. 80.50 crore as per the terms of agreement of the assessee with its parent company as the assessee cannot claim expenditure without recognizing corresponding revenue. 3. That the order of the DRP is erroneous and is not tenable on facts and in law. 4. That the appellant craves leave to add, alter, amend or forgo any ground(s) of appeal either before or at the time of hearing of the appeal. 2.4.3 The assessee has also filed Cross Objections by raising the following grounds: 1. That the Ld. Assessing Officer ('AO') has erred on facts and in law in proposing enhancement of income of the respondent by INR 80.50 crores without appreciating that the respondent cannot recover the service tax liability paid under protest as per the agreement with the parent entity. 2. That the Ld. AO has erred on facts and in law in proposing enhancement of the income by INR 80.50 crores without appreciating that there is no income accrued to the respondent on payment of statutory liability of service tax under protest. 3. That the Ld. AO has not made....
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....rejected merely on the ground that data for entire financial year is not available. It was submitted that the Hon'ble Delhi High Court had held that if from the available data on record, the results for financial year can be reasonably compiled, then the comparables cannot be excluded solely on the ground that the comparables have a different financial year ending. Apart from this order of the Hon'ble Delhi High Court, the Ld. Authorized Representative also placed reliance on numerous order of this Tribunal for the proposition that a different financial year ending cannot be the sole basis for rejecting a comparable if the comparable is otherwise functionally similar. 3.2 With respect to the comparable Sonata Software Ltd., the Ld. Authorized Representative submitted that the related party transactions of this company were 53.83% whereas the TPO himself had applied the RPT Filter of 25%. It was submitted that, thus, evidently, the TPO himself had failed to correctly apply the filter in the case of this company. It was further submitted that the Ld. DRP had routinely upheld the order of the TPO and, therefore, the assessee was praying for exclusion of this company from the final li....
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....as deduction in the return of income. It was further submitted that subsequently in Financial Year 2009-10, i.e., relevant to the year under appeal, the entire amount of Rs.3,11,80,867/- was automatically reversed in the accounting system (SAP) of the company instead of reversing only Rs.57,27,392/- which had been debited in the immediate preceding years. Thus, an additional amount of Rs.2,54,53,473/- (being the difference between the two amounts) had been offered to tax erroneously. It was further submitted that in Financial Year 2012-13 i.e., Assessment Year 2013-14, the assessee had reversed this additional income of Rs.25,45,53,475/- to square up the accounts and expenses of Rs.2,54,53,475/- had been debited to the Profit & Loss Account. The Ld. Authorized Representative submitted that relief with respect to the additional amount of Rs.2,54,53,475/- offered to tax should be allowed to the assessee. It was submitted that an identical issue had arisen before this Tribunal in assessee's own case in Assessment Year 2008-09 also and the ITAT in ITA No.6417/Del/2012 had restored this matter to the file of the Assessing Officer for allowing the assessee's claim after due verification.....
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....d in [2006] 284 ITR 323 (SC), the action of Assessing Officer was valid in law. 5.0 Coming to the appeal of the Department, the Ld. Sr. DR argued that the sole issue in the Department's appeal was the issue of Rs.70 Crores of service tax which had been paid by the assessee under protest and the Ld. DRP had erred in directing that the same was an allowable deduction u/s 43B of the Act. It was submitted that the assessee had received a show cause notice from the Service Tax Department alleging non-payment of service tax vide notice dated 24.04.2008 and on 23rd September, 2008 relevant to Assessment Year 2009-10, the Ld. CIT of Service Tax had passed an order confirming demand of service tax on service provided to Overseas AEs for which consideration was received in foreign exchange. It was submitted that during the pendency of the assessee's appeal against demand of service tax, the CESTAT directed the deposit of Rs.70 Crores and when the matter was carried to the Hon'ble Delhi High Court, the Hon'ble Delhi High Court confirmed the requirement of such pre-deposit which was complied by the assessee and deduction was claimed u/s 43B of the Act. It was submitted that the Assessing Offi....
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.... reliance placed by the Ld. Authorized Representative on the order of the Hon'ble Delhi High Court in the case of CIT vs. Mckinsey Knowledge Centre India Pvt. Ltd. in ITA No.217/2014. We note that the Ld. DRP has noted that these companies were using multiple year data and, therefore, these companies were to be excluded. However, a perusal of the paper book filed by the assessee shows that this observation of the Ld. DRP is incorrect as, evidently, the assessee is using a single year data. We also note that the only ground for exclusion, as propounded by the TPO, is the ground that these companies were having a different financial year ending. As we have already mentioned that now it is settled law that if the data is available in the public domain which can be compiled and collated so as to arrive at financial results corresponding to the financial year ending of the tested party and where there are no other factors which would otherwise distort the results, then such companies would have to be included in the final set of comparables. From the order of the TPO and the observations of the Ld. DRP no such factors are evident. Therefore, we restore these two comparables to the file ....
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.... must be followed for computing arm's length principle, and for comparing comparable uncontrolled transactions. Reasonably accurate adjustments should be made to eliminate effect of any such differences 7.3. Paragraphs 13 to 16 of OECD guidelines, emphasizes need for working capital adjustment in terms of receivables and payables as under: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the Price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to ....
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.... 7.5 The point in time at which the Receivables, Inventory and Payables should be compared between tested party and comparables, and whether it should be the figures of receivables, inventory payable at the yearend or beginning of the year or average of these figures that should be considered;, 7.6. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with Assessee and Department should be the starting point and depending on the facts and circumstances of a case, further details can be called for. As far as Assessee is concerned, the facts and figures with regard to its business must be furnished. In so far as applying inventory, receivables and payables for computing working capital adjustment alledged by DRP/TPO in case of certain comparables, ITAT Delhi Bench in case of ITO v E Value Servc.com, reported in [2016] 75 taxmann.com 195 held that, insisting on daily balances of working capital requirements to compute working capital adjustment is not proper, as it will be impossible to carry out such exercise and that working capital adjustm....
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....ment year 2007-08, we direct the working capital adjustment to be computed and to be allowed as per actuals after considering exclusions/inclusions of comparables companies in the final set of comparables as discussed herein above. 8.3 Coming to the Corporate Tax grounds in the assessee's appeal we find that on the issue of ad hoc disallowance with respect to Motor Car running expenditure, the ITAT in assesee's own case, for Assessment Year 2008-09 in ITA No. 6417/Del/2012 vide order dated 09.02.2016 had directed the deletion of this disallowance. The relevant observations are reproduced herein under for a ready reference: "6. Ground No.1 is general in nature and ground No.5 is a pre-matured one. Ground to related to the disallowance of 50% of car running and maintenance expenses whereas grounds 3 & 4 related to the excess income of Rs. 2,04,88,369/-offered for taxation in the subject year erroneously on account of automatically worsen of year-end provisions in the accounting system of MCIPL. 7. In respect of ground No. 3 it is the finding of the Ld. AO that the freedom to use car was with the employee and the company only monitors it by putting an overall ceiling on the amou....
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....to the assesee if the assessee's claim was found correct. The relevant directions of the Tribunal are being reproduced here in under: 10. Now coming to grounds No. 4 and 5, it is submitted by the Ld. AR that in the financial year 2007-08, the assessee company has been booking year-end provisions in its profit and loss account and out of such provisions the statutory auditors of the company had reversed half the amount being excess in nature at the time of finalisation of the books of accounts and claimed only the remaining half as deduction in the return of income. However, subsequently in the financial year 2008-09 the entire amount of provision was automatically reversed in the accounting system of the company as a normal industry practice instead of reversing the amount that was debited to the profit and loss account in financial year 2007-08, resulting in an additional amount being offered to tax in the written of income erroneously. 11. He further submitted that in the financial year 2012-13 the assessee had reversed the above additional income to square up the account and an expense has been debited to the profit and loss account. In the return of income for the financia....