TaxTMI 
TaxTMI 
2021 (8) TMI 1360
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....02,289 TO THE INTERNATIONAL TRANSACTIONS: 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 prof....
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....tock Option Plan debited to Profit & Loss Account during the year under consideration be allowed as deductible expenditure u/s 37 of the Income Tax Act, 1961 while computing income under the heard profit 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 aft....
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....sultancy Services. It uses tools like computer-aided-manufacturing (CAM) and computer- aided-engineering (CAE) for rendering services to various industries like automobile, semi-conductor, toys and general engineering 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 fur....
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....s database and did not explore comparables in other databases like Capitaline Plus etc. to broad base the search criteria. Therefore, Ld. TPO proceeded to conduct fresh search after applying certain filters. As a result, all the 7 comparable entities selected by the 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....
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....he assessee has subscribed to the shares at the face value without any premium and therefore, the transactions were at Arm's Length. It was also submitted that the transactions were not in the nature of loans or advances rather the same were investments made by the assessee to fund the expansion plan of USA subsidiary and to strengthen its Balance Sheet which had accumulated losses. 4.2 However, the assessee, in the 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....
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....g assessee's comparable entities by applying the Related Party Filter (RPT) filter and export filter. The assessee also objected to selection of key word (ITeS services) by Ld. TPO by submitting that assessee was engaged in providing engineering design services and CAM / CAE services which, though may be falling under ITeS sector, however, the said function was completely different involving different skill sets, functions as compared 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 ....
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.... necessitate application of TP regulations. Finally, the adjustment proposed by Ld. AO was upheld. Regarding equity investment, Ld. CIT(A), in the light of explanation (i)(c) of Sec 92B, held that the capital financing would be international transactions and accordingly, the benchmarking of the same was required as per TP regulations. Regarding submissions that the credit facilities could not be used to advance shares / debentures, it was observed 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....
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....s Sales It could be seen that assessee's AEs were providing marketing services in overseas markets against lump-sum fees. Therefore, the selling and marketing expenses incurred in domestic segment were rightly allocated to non-AE sales by the assessee. There was no justification to allocate the same to AE segment. So far as the compensation for use of premises is concerned, we are of the opinion that this expenditure would mostly be fixed in nature and would bear no relation with the turnover. 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 n....
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....Technologies Ltd. This entity has been excluded by Tribunal in WNS Global Services (P.) Ltd. V/s ITO (103 Taxmann.com 75) wherein it was held that this entity was non-comparable entity for ITeS segment. The reason being that the nature of services being provided by this entity would require application of knowledge and advanced analytical and technical skill. This entity had provided on-site services as compared to assessee and therefore, could not be accepted as valid comparable. Considering the same, we direct for exclusion of this entity. (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 ....
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....No. 436/Del/2013, dated 20/03/2018]. Further, this entity was found to have undergone restructuring and therefore, held to be non-comparable. Similar was the view of Mumbai Tribunal in Dialogic Networks (I) P. Ltd. Vs. ACIT, (ITA No. 7280/Mum/2012, dated 27/07/2018). This entity has also been excluded by Tribunal in WNS Global Services (P.) Ltd. V/s ITO (103 Taxmann.com 75) on the ground of functional dis-similarity. Respectfully following the same, we direct for exclusion of this entity. 11. The following decisions, as cited by Ld. AR, also support the exclusion of all 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 ....
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....s, in our opinion, was based more on mere allegations rather than being based on any tangible evidence on record. The assessee was holding company of its AE and any adverse working of AE would directly impact assessee's interest. It was true that had the AE obtained the funds through loan / debt, it would have to meet interest expenses at regular interval which would have ultimately affected its profitability and would not have provided the requisite cash-flow to carry on its business swiftly. The assessee, as a holding company, had infused funds in its subsidiary with a long-term objective through equity mode so as to enable the AE to carry on its business smoothly and swiftly. The Ld. TPO failed to distinguish between loan and capital contribution 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 preced....
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....t convinced with the approach of lower authorities, we hold that no addition would be warranted on this account. To arrive at aforesaid conclusion, we draw strength from the observation of Hon'ble Bombay High Court in Pr. CIT V/s Aegis Limited (ITA No. 1248 of 2016 dated 28/01/2019) wherein Hon'ble court has observed that in the absence of finding that the transaction was sham, the TPO could not have treated such transaction as a loan and charge interest thereon on notional basis. The aforesaid decision of Tribunal has placed reliance on the decision of Hon'ble Bombay High Court in Pr. CIT V/s Aegis Limited (ITA No. 1248 of 2016 dated 28/01/2019). Therefore, considering the factual matrix, we direct Ld. AO to delete this adjustment. The ground, to that 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 ....
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....4C(3) of the Act on 28/03/2013 pursuant to the directions of Ld. TPO order dated 29/01/2013. The assessee preferred objections before Ld. DRP which were disposed-off vide directions dated 23/12/2013. Following the same, an assessment order has been passed by Ld. AO u/s 143(3) r.w.s. 144C(13) on 22/01/2014. The adjudication by Ld. DRP has given rise to cross-appeals before us. 16.2 The ground raised by the revenue read as under: - (i) The Learned DRP has erred on facts and in law in deleting the transfer pricing adjustment of Rs.17,49,13,053/- made on account of provision of IT enabled services and Engineering Design Services without properly appreciating the factual and legal matrix of the case as clearly brought out by the TPO and Assessing Officer in the Draft 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....
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....idering assessee's submissions, Ld. TPO finally chose to adopt assessee's entity level margin of -19.95%. The mean margin of final set of 14 entities was determined as 28.58% as follows: - No. Name of the comparable PLI (OP/TC) % 1. Cethar Consulting Engineers Ltd. 28.76% 2. Chemtax Global Engineers Pvt. Ltd. 1.20% 3. Corrtech Energy Ltd. 20.63% 4. IOT Design & Engg. Ltd. 4.77% 5. L&T Sargent & Lundy Ltd. 42.19% 6. Mahindra Consulting Engineers Ltd. 43.49% 7. Mahindra Engineering Services Ltd. 39.25% 8. Michigan Engineers Pvt. Ltd. 12.16% 9. Oil field Instrumentation India Pvt. Ltd. 39.84% 10. Simon India Ltd. 6.88% 11. Acropetal Technologies Ltd. 21.30% 12. HDO Technologies Ltd. 13.94% 13. Mold-Tek Technologies Ltd. 60.92% 14. Bodhtree Ltd.64.82% Average 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....
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....ssee's AE and therefore, there would be no question of computing ALP of the same. Concurring with the conclusion of Ld. DRP, we dismiss Ground Nos. 1 & 2 of revenue's appeal. So far as the margin of 5% as retained by OTG-Germany is concerned, we find that percentage of revenue earned from this entity is merely 1.71% of total revenue earned by the assessee. The margin retained by this entity was quite less than mean margin of 8.89% reflected by comparable entities as selected by the assessee in its TP study report (though we do not accept foreign AE as tested party as held in AY 2008-09). Nevertheless, the assessee's segmental PLI of 45.57% was much above the mean margin of comparable entities selected by Ld. TPO. Therefore, no fault could be found in the approach of Ld. DRP. 19. So far as the computation of notional interest on Share Application money is concerned, we find that factual matrix is similar as in AY 2008-09. Therefore, our adjudication as for AY 2008-09 would apply here also. Taking the same view, we would hold that re-characterization of these transactions as loans / advances was not justified and accordingly, we delete the adjustment as made by lower authoritie....