TaxTMI 
TaxTMI 
2021 (8) TMI 1360
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.... 2.1 On the facts and circumstances of the case and in law, the Ld. CIT (A) erred in confirming the adjustment in ALP of Rs.7,33,02,289 to the value of international transactions. 2.2 The Ld. CIT (A) erred in confirming the adjustment to the ALP on account of the following: 2.2.1 Transaction towards IT Enabled Services of Rs.2,01,51,590: 2.2.1.1 The Ld.CIT(A) erred in confirming ITES companies as comparable companies instead of EDS companies 2.2.1.2 The Ld. CIT(A) erred in upholding that the Ao has rightly allocated indirect overheads based on sales ratio 2.2.1.3 The Ld. CIT (A) erred in not accepting appellant contention that it is a section 10A unit and that there could not be any intention to shift profits. 2.2.1.4 The Ld. CIT(A) failed to appreciate that; > Appellant being engaged in the business of rendering EDS/CAD related services, comparables from ITES sector cannot be considered while computing ALP; > Allocation of indirect overheads should be made as per cost accounting principles; > Appellant being 10A unit, there could not be any intension to shift profits, 2.2.2 Investment in equity share capital of AE in USA of Rs.93,83,554. 2.2.2.1 The L....
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....t and gains of business. We find that similar additional ground has been admitted by the Bench in its order for AY 2007-08, ITA No.7512/Mum/2011 order dated 09/10/2019 in assessee's own case, a copy of which is on record. Therefore, adopting consistent approach in the matter and applying the ratio of decision of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. V/s CIT (229 ITR 383), we admit this ground of appeal as ground No.3. At the same time, we find that this issue is squarely covered in assessee's favor by the decision of special bench of Tribunal in the case of Biocon Limited V/s DCIT (144 ITD 21) as approved by Hon'ble Karnataka High Court which is reported at 121 Taxmann.com 351. Similar is the decision of Hon'ble Madras High Court in PVP Ventures Ltd. (211 Taxman 554) and decision of Mumbai Tribunal in HDFC Bank Ltd. (155 ITD 765) where such expenses has been held to be an allowable expenditure. Therefore, we direct Ld. AO to allow the expenditure after due verification. This ground stand allowed for statistical purposes. 1.3 The only ground that remains to be adjudicated is ground no.2 wherein the assessee is aggrieved by confirmation of certain tra....
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....ering like sheet metals, castings and plastics. The services being rendered by the assessee has been classified by Ld. Transfer Pricing Officer (TPO) as Information-Technology enabled services (ITeS). 2.3 Since the assessee carried out certain international transactions with two of its Associated Enterprises (AE) as referred to above, the same were referred to Ld. Transfer Pricing Officer-II(5), Mumbai (TPO) u/s 92CA(1) for determination of Arm's Length Price (ALP). The Transfer Pricing (TP) adjustment as proposed by Ld. TPO, in its order dated 21/10/2011 u/s 92CA(3), were incorporated in draft assessment order dated 28/12/2011. The assessee did not prefer objections before Ld. DRP and accordingly, final assessment order was passed on 04/02/2012 in accordance with TP adjustment as proposed by Ld. TPO. Though the assessee preferred further appeal before Ld. CIT(A), however, the appeal was partly allowed in impugned order dated 17/10/2013. Aggrieved, the assessee is in further appeal before us. 2.4 The nature of international transactions which are the subject matter of appeal before us is as follows: - No. Nature Amount (Rs. In Lacs) Benchmarking Method adopted by assessee 1.....
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....e assessee got rejected on certain filters viz. Related Party Transaction (RPT) filter, export filter, absence of segmental Profit & Loss for ITeS etc. It was also held that assessee's TP documentation was not correct and reliable and therefore, the same was to be rejected. 3.4 Using Prowess and Capitaline Plus databases, Ld. TPO picked-up 22 comparables entities having mean margin of 27.53% which are tabulated in para-12 of Ld. TPO's order. The assessee opposed the disturbance of its own PLI and relied upon Rule-10D (4) for the submission that the information and documents should be contemporaneous and should exist latest by specified date referred in clause (iv) of Sec.92F which for this year would be 31/10/2008. The data used by the assessee was stated to be as prevailing during September, 2008. The assessee also objected to inclusion of certain comparable entities on various grounds viz. high turnover, ITeS revenue less than 75% of operating revenue, exclusion of entities having export turnover of less than 75% etc. 3.5 However, the same could not find favor with Ld. TPO except to the extent of exclusion of 8 comparable entities. The mean margin of remaining 15 entities was w....
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....opinion of Ld. TPO, could not demonstrate as to how the share subscription was utilized at the end of AE. The share subscription was in the nature of deficit financing and for the purpose of strengthening the AE's capital position. The subscription was nothing but only a method to extend financial help to the subsidiary by indirect means under the cover of investment in equity. Ultimately, the transactions were held to be nothing but unsecured loans / advances on which interest was to be charged by the assessee. Applying interest rate of 12% on these transactions, Ld. TPO computed TP adjustment of Rs.93.83 Lacs and proposed the same in his order. 5. Reimbursement to OTI-USA for purchase of software from third- party The assessee reimbursed a sum of Rs.437.67 Lacs to its AE towards purchases of certain software from third-party namely Orasoft. In support, the assessee furnished copies of invoices & debit note issued by the AE. However, the assessee, in the opinion of Ld. TPO, could not furnish any tangible evidence or any satisfactory explanation with respect to receipt of services. The invoice would not carry any evidentiary value since it does not indicate as to for whom the ser....
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.... to other ITeS services. The assessee, in the alternative, conducted fresh search taking foreign AEs as the tested party as accepted by revenue in AYs 2003-04 to 2005-06. In this study, the margin of AEs was shown to be lower than mean margin of comparable entities. The assessee pleaded for acceptance of foreign AE as tested party it being the least complex entity. However, it was observed that in AY 2006-07, foreign AE as tested party, was not accepted by revenue and the same was confirmed by Tribunal. The assessee also conducted fresh search for EDC companies and arrived at average PLI of 9.05%. Another plea raised by the assessee was that it was enjoying exemption u/s 10A benefits in India and there would be no incentive to shift profits outside India. 6.2 Regarding equity investment in OTI-USA, the assessee contended that this transaction was not an international transaction as defined in Sec.92B. Alternatively, majority of the investment was out of interest free funds available with the assessee. As per the credit sanction letter issued by the banker, the loans / credit facilities could not be used to make investment in shares / debentures of subsidiaries. The shares were su....
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....served that the accounts of the assessee were mixed one and it could not be proved by the assessee that no such funds were used for making the investments. The RBI rules only determined the outer limits for the payment and do not go into the issue of determination of ALP. Therefore, the action of Ld TPO in benchmarking the same was upheld. The rate of 12% was held to be reasonable. Regarding software purchase, it was observed that no distinction was carved out under the provisions between capital account transactions or trading transactions. It was nowhere mentioned that if capital account transactions undertaken were not at ALP, then TP provisions would be allocable only to the extent of impairment of corresponding income in the taxpayers' profit & loss account. Therefore, the assessee's reasoning was to be rejected. The assessee filed certificate of Auditor and agreement which were not produced before Ld. TPO and therefore, the same would tantamount to additional evidences which could not be taken cognizance of. Finally, this adjustment was also upheld. Aggrieved as aforesaid, the assessee is in further appeal before us. Our findings & Adjudication 8. So far as the material f....
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....urnover. The same has to be incurred irrespective of quantum of turnover. On the other hand, if the number of employees were more, the assessee would require larger premises and the expenditure would be more. Thus, allocating the same on the basis of number of employees would be more scientific method of allocating these costs. Similar is with electricity cost. More the employees more would be such cost. Therefore, we do not concur with Ld. TPO's approach in allocating the same on the basis of sales. The method adopted by the assessee was more scientific and supported by guidance note issued by the Institute of Cost Accountants of India for allocating administrative overheads which provide for number of employees as one of valid allocation key. Therefore, the assessee's PLI of 21.36% & 21.53% with respect to OTI-USA & OTG-Germany was to be accepted. We order so. 10. Proceeding further, Ld. AR has sought exclusion of certain comparable entities as finally accepted by Ld. TPO. The same is on the premises that entities were functionally different or had a corporate action (merger, demerger etc.) during the year or they reflected abnormally high margins. To support exclusion of these ....
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....(iii)Coral Hubs Ltd. This entity has been excluded by Tribunal in WNS Global Services (P.) Ltd. V/s ITO (103 Taxmann.com 75) on the ground that this entity had outsourced most of its work to third-party vendors. The business model of this entity was found to be totally different from assessee's business model. Since similar are the fact in this case, we direct for exclusion of this entity. (iv) Eclerx Services Ltd. This entity has been excluded by Mumbai Tribunal in the case of Deutche CIB Centre Private Limited Vs. ACIT, (ITA No.134/Mum/2013; 09/11/2020) wherein the bench directed for exclusion of this entity by observing that this entity acquired a UK based company viz. Igentica Travel Solutions Ltd during the year. As a result, 28 large customers got introduced to this entity which resulted into abnormal profit of 65.88% during the year under consideration. Further, this entity was found to have outsourced services to third-parties to the extent of 20.39% of its total expenses. Thus, this entity was held to be functionally different. Similar is the decision of this Tribunal in WNS Global Services (P.) Ltd. V/s ITO (103 Taxmann.com 75) wherein this entity is found to be non-....
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.... these entities: - * ITA No. 483/Mum/2013 - Teleperformence Global Services Private Limited vs. ACIT, Circle 1(2), Mumbai - Hon. ITAT, Mumbai Bench * ITA No. 7498/Mum/2012 - Lionbridge Technologies Private Limited vs. ITO - 8(2)(2), Mumbai - Hon. ITAT, Mumbai Bench * ITA No. 1144/Hyd/2014 and 1145/Hyd/2014 - BA Continuum India Private Limited - Hon. ITAT, Hyderabad Bench * ITA No. 46/Del/2013 - NTT Data Global Delivery Services Ltd. vs. ITO Ward - 5(2), New Delhi - Hon. ITAT, Delhi Bench * ITA No. 436/Del/2013 and 496/Del/2013 - H & S Software Development and Knowledge Management Centre Pvt. Ltd vs. DCIT, Circle 10(1), New Delhi - Hon. ITAT, Delhi Bench * ITA No. 6008/Del/2012 - GE India Business Services Pvt. Ltd. vs. The A.C.I.T Circle - 10(1), New Delhi - Hon. ITAT, Delhi Bench * ITA No. 6328/Del/2012 - Corporate Executive Board India Pvt. Ltd. vs. Asst. Commissioner of Income Tax, Circle - 1(1), Gurgaon - Hon. ITAT, Delhi Bench * ITA No. 6381/Del/2012 - IHG IT Services (India) Pvt. Ltd. vs. DCIT, Circle 11(1), New Delhi - Hon. ITAT, Delhi Bench. * ITA No. 6408/Del/2012 - Blackrock Services India Pvt. Ltd vs. ACIT, Circle - 1(1), Gurgaon - Hon. ITAT, Delhi Benc....
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....ion by way of equity. Therefore, we do not concur with the approach / action of lower authorities in re-characterizing the transactions as loans / advances and make TP adjustment based on notional interest computation. Our view is duly supported by the decision of this Tribunal in Voltas Limited V/s DCIT (116 Taxmann.com 324) which held as under: - 3.5.7 Upon careful consideration of factual matrix as enumerated by us in the preceding paragraphs, the undisputed position that emerges is the fact that the assessee has advanced Share Application Money to one of its AE situated in Saudi Arabia with a view to acquire further stake in that entity. The entity has become wholly owned subsidiary of the assessee company during the month of January, 2009. The financial health of its AE was not good and the money was advanced with a view to infuse further capital in the AE and with a view to acquire controlling stake in its AE. The money has been utilized by its AE to pay-off business debts and to meet working capital requirements. Another undisputed fact is that ultimately the shares have been allotted to the assessee during December, 2015 after getting the desired regulatory approvals from....
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....t extent, stands allowed. 14. Coming to Transfer Pricing (TP) adjustment arising out of reimbursement of software expenses to OTI-USA, it could be seen that the assessee has reimbursed a sum of Rs.437.67 Lacs towards purchase of certain software from third-party namely Orasoft. The AE made payment on behalf of the assessee from time to time and raised consolidated debit note / invoice at year-end against the assessee. The amount so paid was duly reflected by the assessee as advance for software in the Balance Sheet. The copies of the invoice raised by Orasoft and copies of invoice raised by overseas-AE have been placed on record (page 492 & 496 of paper-book). It could be seen that M/s Orasoft has invoiced assessee's AE on various dates from time to time. M/s OTI-USA has charged the assessee by way of debit note at year-end. The overseas-AE has entered into software development agreement with Orasoft on 01/04/2007. Upon perusal of the terms, it could be seen that this agreement has been entered on behalf of assessee wherein the assessee as a software-developer has engaged the services of Orasoft for developing software tools, utilities and modules for onsite and off-shore business....
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....aft Assessment Order. (ii) The Learned DRP has erred on facts and in law deleting the transfer pricing adjustment of Rs.17,49,13,053/- on basis of additional evidences which were opposed by the TPO in his remand report. (iii) The Learned DRP has erred on facts and in law in deleting the transfer pricing adjustment of Rs.34,66,793/- on account of interest imputed on refund of share application money without properly appreciating the fact that the assessee has transferred the benefit of fund to A.E. in the name of Share Application Money. 16.3 The assessee has raised 4 grounds out of which ground no.3 has not been pressed whereas ground no.4 is related to initiation of penalty which is pre-mature. Therefore, ground nos. 3 & 4 stand dismissed. The assessee has raised additional ground of appeal which is similar to additional ground raised in AY 2008-09. Since this ground has been admitted in AY 2008-09, the same is admitted in this year also as Ground No.5. The grounds to be adjudicated are Ground Nos. 1, 2 & 5 which read as under: - 1. Adjustment in ALP of Rs.15,59,397/- to the value of International Transactions 2. Non grant of claim made for Late Employees Contribution....
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....rage PLI Margin 28.58% Applying the same, the TP adjustment was thus computed at Rs.1749.13 Lacs in the following manner: - Operational Cost 36,04,55,105/- 128.58% of operation cost (1) 46,34,73,174/- Sales / Operational Income (2) 28,85,60,121/- Difference (1)-(2) 17,49,13,053/- 105% of Sales / Operational Income (A) 30,29,88,127/- 95% of Sales / Operational Income (B) 27,41,32,115/- It could be seen that the adjustment has been proposed by applying entity level TNMM against the entire turnover including domestic turnover as against the fact that the quantum of AE sales was approx. 42% of total turnover (1220.36 Lacs / 2885.60 Lacs x 100). 17.3 The second adjustment was on account of share application money advanced by the assessee to its AE. Applying borrowing rate of 14.05% to the Share Application money, Ld. TPO proposed an adjustment of Rs.34.66 Lacs. 17.4 Before Ld. DRP, the assessee, inter-alia, submitted that billings done by OTI-USA to end customers was recovered by the assessee in its entirety and therefore, these transactions stand the test of ALP under CUP method. The attention was drawn to the fact that OTI-USA did not charge any marketing fees during ....