TaxTMI 
TaxTMI 
TaxTMI 
2020 (11) TMI 1097
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.... postal records has been issue beyond the time limit specified under sub-section (13) of section 144C of the Incometax Act, 1961 ("the Act") and therefore bad in law. B. Transfer Pricing 3. That on facts and in the circumstances of the case, the learned AO/ learned TPO erred in making an upward adjustment to the transfer price of the Appellant's international transactions of INR 10,508,698 in respect of software development services and INR 7,23,881 on account of imputation of notional interest on outstanding receivables. The learned DRP erred in further enhancing the adjustment in respect of Appellant's software development services to INR 11,884,856 and confirming the adjustment of INR 723,881 in respect of notional interest on outstanding receivables. Grounds for software development services 4. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of the software development services, the learned DRP/ AO/ TPO erred in: 4.1. Rejecting the Transfer Pricing (`TP') documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence. 4.2. Rejecting the comparability a....
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....ermining the operating mark-up of the comparable companies. 4.11. Rejecting the segmental financial information as provided by the Appellant and reallocating the "other expenses" between the Software development services, Marketing and support services and Data center services segment on the basis of revenue by disregarding the documents/ information submitted by the Appellant before the learned Panel during the DRP proceedings, supporting the allocation methodology adopted by the Appellant for the segmentation. 4.12.Not providing adjustment for the differences in working capital of the Appellant and the comparable companies. 4.13.Not providing suitable adjustment to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies. 4.14. Computing incorrect operating mark-up of certain comparable companies. (Tax Effect: INR 3,621,178) Grounds for imputat ion of not ional interest on outstanding receivables 5. On facts and in the circumstances of the case, the learned DRP/AO/TPO erred in : 5.1. Considering overdue receivables from Associated Enterprises (`AEs') as an international transaction under the provisions of Section 92B of the Act....
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....sional expenses together amounting to INR 4,000,000 on account of failure to furnish invoices. 10. That the proceedings before the learned AO/ Hon'ble DRP suffered from lack of natural justice as the learned AO/ Hon'ble DRP did not give an opportunity to rebut the estimate of arriving at the disallowance. (Tax effect: INR 1,297,800) D. Other miscellaneous grounds 11. The consequential relief is to be granted in computation of interest under section 234B and section 234C of the Act. (Tax effect: INR 3,414,676) 12. The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act despite the fact that the Appellant has acted in a bona fide manner and provided all necessary details called for by the Assessing Officer. 2. Facts of the case are that Blue Coat India is the subsidiary of Blue Coat Systems BV, Netherlands, which in turn is a subsidiary of Blue Coat US, Blue Coat India has been set up as a captive contract software development unit of the Blue Coat Group. Pursuant to a Research and Development Services agreement ("SWD Agreement") effective April 1, 2013, executed between Blue Coat Switzer and Blue Coat India, Blue Coat India provi....
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....ces, c) Receipt for provision of data center equipment and other support, and d) Recovery of restructuring costs. 2.2 As per the Transfer Pricing (TP) document furnished for the FY 2013-14, the Taxpayer company has entered into the following International Transactions with its Associated Enterprises (AEs): As per the 3CEB Particulars Amt (Recd) Method Software Development Services 4,69,09,496 TNMM Marketing and Sales Support Services 10,12,55,499 TNMM Date Centre Services 38,55,055 TNMM Recovery of restructuring costs 12,48,076 TNMM Total 15,32,68,126 As per the TP study Particulars Amount Receipt from Software development services 4,69,09,496 Particulars Amount Receipt from marketing support services 10,12,55,499 Receipt from data centre services 38,55,055 Recovery of restructuring costs 12,48,076 Total 15,31,68,126 3. While completing the TP study, the TPO rejected certain comparables selected by the assessee and included his own comparables and by applying TNMM method as most appropriate method to determine the arm's length price and made an adjustment of Rs.1,12,32,579/- by considering following comparables: 1. Infosys....
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....ucts or solutions. These platforms / products and solutions are not off the shell products as argued by the assessee. As a per the P& L account, the company has revenue from software services of Rs.42,531/- crores and from software products of Rs.18,101/- crores, and that the product revenue constitute meagre 4.08% of total operating revenue. Therefore, taking into consideration the various information available in the annual report, and the fact that the company in predominately having revenue from software services, this company can be considered as functionally comparable to the assessee. 6.1. It was pointed out that the merger of Infosys Consulting India Limited has been accounted for under pooling of interest method, and that the assets and liabilities of ICIL have been transferred to Infosys Limited on a going concern basis. On account of such merger, it was pleaded that this company should be excluded. But the assessee could not point any information from the annual report to indicate that such merger has affected and impacted the revenue of the comparable company. As ICIL is also engaged in same line of business, there is no difference in functional comparability. As there....
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.... as comparable to assessee's case and order of the lower authorities to be confirmed. 7. We have heard the rival submissions, perused the materials available on record and gone through the orders of the authorities below. The Tribunal in the case of LG Soft India Limited in IT(TP)A No.3122/Bang/2018 vide order dated 28.5.2019 considered the Infosys Limited as not comparable to the assessee's case by observing as follows: "6. We notice that the co-ordinate bench has excluded M/s. Infosys Ltd in AY 2008-09 by following the decision rendered by another co-ordinate bench in the case of 3DPLM Software Solutions Ltd. (IT(TP)A No.1303/Bang/2012 dated 28.11.2013, wherein the decision rendered in the case of Triology E Business Software India P Ltd. (ITA No.1054/Bang/2011) was followed and it was held that M/s. Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the breakup of revenue from software services and software product is not available. 6.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in ....
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....ement Consultants (P) Ltd. vs DCIT has not considered details that has been obtained under 133 (6) in respect of this company for year under consideration. Therefore, in our opinion this decision cannot be of any help to revenue. Coming to information received under section 133 (6) of the Act, it is observed that this company has acquired certain intellectual property products and generate revenue from licensing and support of such products. It is also observed that this company is involved in the entire life-cycle of software development which is not similar to what assessee caters to its associated enterprises. Assessee carries out only such functions which are required by associated enterprise under its supervision and guidance." 12. The reading of that whole paragraph suggest that Persistent Systems Limited was excluded from the comparable. However, due to typographical error, it was mentioned as "included" instead of mentioning "excluded". Accordingly, we direct the A.O/TPO to exclude Persistent Systems Limited from the list of comparables. Mindtree Limited:- 13. Ld. A.R. submitted that Mind Tree Limited is engaged in end to end digital transformation and technology se....
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....search Lab India Pvt. Ltd. cited (supra) and observed as under: "This comparable has been included by Ld.TPO the f inal l ist . Ld. counsel submi t ted that i t is funct ional ly not simi lar wi th that of assessee. It is submit ted that assessee engaged in providing services such as Agi le, analyt ics and informat ion management , appl icat ion development and maintenance, business process management , business technology consul t ing, Cloud, Digital business, independent testing, infrastructure management services, mobi l i ty, product engineering and SAP services. Ld.AR referred to page 1088 in support . It is further been submit ted that this company does not have segmental informat ion on the basis of which revenue earned from di f ferent verticals could be ident i fied. This company also owns huge intangibles and therefore deserves to be excluded. On the contrary Ld. CIT DR placed reliance upon orders passed by authorities below. We have examined the annual reports of this company and it is observed that this company carries out research and development activities and has created large intangibles. Under such circumstances we do not find this company to be comparable ....
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....d on geographical areas, viz Domestic = India (products and services) and International = rest of the world (exports-software services). It is also been submitted therein that this company maintains separate books of account for the reported segments. In profit and loss account at page 2431, it is observed that during the year under consideration, this company earned revenue from sale of products whereas, revenue from sale of services is shown to be at 'nil'. Ld.TPO while considering this comparable only considered footnote at page 2433, wherein bifurcations of revenue from sale of products has been given as; export of software services has been recorded to be at Rs.20194.37, software services from local units amounting to Rs.414.07, revenue from subscription and training amounting to Rs.59.32 and sale of licenses amounting to Rs.7.98. We therefore reject the contention of assessee that segmental details are not available in respect of this comparable. In our view Ld.TPO has considered the export of software service segment for purposes of comparability with that of assessee (refer computation of margin for this comparable at page 55 of order passed by Ld.TPO). Respectfu....
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....this Tribunal observed and decided as under: 9. In respect of the applicability of this Tribunal order for exclusion of Larsen & Toubro Infotech Ltd, this has been submitted by ld. AR of assessee in the chart submitted before us that on page no. 698 of Annual Report paper book, this company has debited an amount of Rs. 27,10,89,274/- as cost of bought-out items for resale. But this fact was not brought to the notice of the Tribunal in the case of Advice America Software Development Center (P.) Ltd. (supra). It has also been submitted that on page no. 706 of Annual Report paper book, this has been reported that this company is engaged in sale of services to its related parties and this fact was also not brought to the noticeof Tribunal in case of Advice America Software Development Center (P.) Ltd. (supra). When we examine paras 14 to 20 of this Tribunal order where there is discussion regarding inclusion/ exclusion of Larsen & Toubro Infotech Ltd, we find that there is no discussion on these two aspects that this company is having significant amount of cost of bought-out items for resale and it is engaged in sale of services and products to its related parties and hence, in our ....
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....ies Pvt. Ltd. 26. Further, assessee has not considered other comparables raised in its ground to be included. The other comparables assessee not pressed. I2T2 India Limited: 27. First we will consider I2T2 India Limited. The Ld. A.R. submitted that I2T2 Limited is engaged in the Software development services and passes all filters followed by the TPO. 28. Ld. D.R. submitted that the company is in the IT enabled Services industry and has not done transaction processing work which is not functionally comparable to assessee's case. 29. We have heard the rival submissions and perused the materials available on record. We find force in the argument of Ld. D.R. as seen from the direct report of the I2T2 India Ltd. for the year ending on 31.3.2014, which is placed on record in page no.1837 that assessee is engaged in IT enabled services industry and it cannot be compared with assessee's case, which is engaged in Software development services marketing support services and data centre services and accordingly, exclusion is justified. We confirm the findings of the loer authorities on this comparable. Daffodil Software Limited:- 30. The Ld. A.R. submitted that the Daffodil Softwar....
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....consideration. Maveric Systems Ltd.:- 37. Ld. A.R. submitted that this is functionally compared to assessee's case as this assessee is engaged in rendering software development services and incurring substantial amount on R&D won't effect is revenue. He relied on the order of the Tribunal Pune bench in the case of Xpanxion International Pvt. Ltd. in ITA No.666/Pune/2016 dated 14.5.2019 in support. 38. On the other hand, Ld. D.R. submitted that the company incurred substantial expenses to the tune of 6% of turnover towards R&D, which is beyond the generally acceptable tolerable limit of 3% of revenue, hence, it cannot be comparable to the assessee's case. More so, before the DRP assessee has not controverted this finding of the TPO. 39. We have heard the rival submissions and perused the materials available on record. This comparable was considered by Pune bench in the case of Xpanxion International Pvt. Ltd. (supra) and observed as follows: "8. We have heard the rival contentions and perused the record. Briefly, in the facts of the case, the assessee was engaged in the business of provision of software development services. The assessee had picked up TNMM method to benchmark....
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.... the total revenue. Therefore, this company cannot be considered as comparable. 43. He relied on the order of the Tribunal in the case of Goldman Sachs Research Pvt. Ltd. in IT(TP)A No.3244/Bang/2018 dated 29.1.2020 for this proposition. 44. We have heard the rival submissions and perused the materials available on record. Admittedly, this comparable was considered by this Tribunal and observed in para 6.1 in the case of Goldman Sachs Research Pvt. Ltd. (supra) as follows: "Ld.AR submitted that the assessee prayed for inclusion of this company before DRP. However, DRP rejected the prayer of the assessee for the reason that financial results incorporated branch revenue and profit, which was based on unaudited financial statements of branch outside India. It was also observed by DRP that export revenue constituted only 20.34% which did not fulfill filter applied by Ld.TPO. Ld.AR placed reliance upon annual reports of this company placed at page 2491 of paper book volume 6 wherein at page 2511 geographic income has been tabulated for year under consideration and income from software services and products by this company has been shown to be at 3621.72 lakhs. It is observed at page....
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....o ground nos. 3 & 5.2 above, imputing the notional interest invoice-wise and disregarding the weighted average method of computing the credit period for the outstanding receivables from the AEs. 51. Ld. D.R. submitted that notional interest to be considered as operating income while computing the margin. 52. We have heard the rival submissions, perused the materials available on record and relied on the order of the Tribunal in the case of CGI Information Management Consultation Pvt. Ltd. in IT(TP)A No.505/Bang/2016 dated 30.10.2020. This issue was considered by this Tribunal in the above case as follows: 3.5.7.-We have perused the submissions advanced by both the sides in the light of the records placed before us. This Bench referred to decision of Special Bench of 1"s Tribunal in case of Special Bench of. ITAT in case of Instrum4tation Corpn.1 Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2b09, dated 157-2016, held that outstanding sum of invoices is akin to loan advanced by- assessee to foreign AE., hence it is an international transaction as .per explanation to section 92 B of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, the....
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....ing a consistent view, we remit the issue to the file of the AO/TPO for deciding the same in conformity with the order of the Tribunal in the case of CGI Information Systems & Management Consultants (P) Ltd. cited (supra). 54. Next ground C.6, C.7 & C.8 relates to disallowance of depreciation claimed in respect of additions made during the previous year. Ld. A.R. submitted that the learned AO erred in disallowing excess depreciation amounting to INR 465,396 in respect of fixed assets additions in the previous year 2013-14 of INR 775,660 on account of failure to furnish invoices. The Ld. A.O. further erred in disallowing excess depreciation amounting to INR 1,560,735 in respect of fixed addition in the previous yea? 2013-14 of INR 2,601,225 by considering such addition to be pertaining to previous year 2014-15. Without prejudice to the above, in respect of assets belonging to Computers (including computer software) block of INR 3,009,941, which has been put to use for less than 180 days in the previous year, the learned AO erred in disallowing depreciation in respect of such assets at the rate of 60% instead computing depreciation as per second proviso to subsection (1) of section ....