TaxTMI 
TaxTMI 
2023 (3) TMI 598
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....essee and conducting independent search, inter-alia, on the ground that the Assessee has not applied employee cost filter (ratio of employee cost to total operating cost >25%) even though learned TPO himself has not applied the said filter. Ground No. 3: The learned TPO erred in rejecting the search conducted by the Assessee and conducting independent search, interalia, on the ground that some of the filters applied by the Assessee are not appropriate (such as export f ilter, salary to sales f ilter) even though learned TPO himself has applied same set of filters as summarized below and also the Hon'ble Dispute Resolution Panel ("DRP") has erred in confirming the same. Ground No. 4: The learned TPO grossly erred in conducting independent search by wrongly applying the proviso below Rule 10E3(5) and the Hon'ble DRP has erred in confirming the same. Ground No. 5: The learned TPO has grossly erred in applying related party filter of 25% in his search process instead of 15% as applied by the Assessee relying on various precedents and the Hon'ble DRP has erred in conf irming the same. Ground No. 6: The l....
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....egated with SWD transaction purely on the grounds of administrative convenience. Ground No. 11: 1 The learned TPO and Hon'ble DRP has erred by rejecting the following 7 comparable companies in the marketing and support segment appearing in learned TPO's dump selected by the Assessee on unjustifiable grounds even though they are functionally comparable to the' Assessee: i) Cyber Media Research Et Services Ltd ii) Confluence Integrated Services Pvt Ltd iii) Paradigm Plus Marketing Communications Pvt.Ltd iv) Hindustan Field Services Pvt Ltd v) Retail Scan Management Services Pvt Ltd vi) Mudra Online Technologies Pvt Ltd vii) Concept Public Relations India Ltd Ground No. 12: The learned TPO and Hon'ble DRP has erred on facts and law by comparing the Assessee with the following 2 companies in the marketing and support segment, which have an entirely different functional and risk profile and the Hon'ble DRP has grossly erred in confirming the same. i) Pressman Advertising Ltd ii) Majestic Research Services and Solutions Ltd Ground No. 13: ....
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....consideration on 30/11/2017 and the case was selected for scrutiny. The statutory notices were issued and representatives of the assessee appeared before the Ld. AO and filed requisite details. The Ld. AO observed that assessee had international transactions with the Associated Enterprises and therefore a reference was made to the Transfer Pricing Officer to determine the Arm's Length Price of the International transactions. On receipt of the reference, the Ld. TPO called upon the assessee to file the economic details of the international transactions entered with A.E. in form No.3CEB. The Ld. TPO from the details filed by the assessee observed that following was the international transactions:- International Transactions Nature of Transaction Amount (in Rs.) Method Income from software development services 1,59,43,94,173 TNMM Income from marketing support services 2,56,61,965 TNMM Reimbursement of expenses 1,35,13,207 Other method Withholding from employees and payment on their behalf for purchase of stock under ESPP scheme 61,55,757 Other method 2.2 The Ld.TPO observed that, the assessee used TNMM as the most appropri....
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....n Rs. Sl.No. Particulars Net Block as at March 31, 2017 1 Computers 64,550,203 2 Office Equipment 60,402,966 3 Furniture & Fixture 679,196 4 Leasehold improvements 11,045,454 Total 136,677,819 9.2: Intangibles Radisys India maintains all necessary infrastructures and deploys requisite skilled manpower for the services rendered to its Associated Enterprise. Radisys India does not own any intangible right over the services rendered and software developed. Further, all the intangibles like copy rights; trade names, secrets, patents, etc. are the exclusive property of its Associated Enterprise. 10: RISKS ASSESSMENT 10.1: Foreign Exchange Risk: Exchange rate risk relates to the. potential variability of profits that can arise because o'f changes in foreign exchange rates. The Associated Enterprise makes payment to Radisys India in foreign exchange and thus Radisys India bears the risk of foreign exchange fluctuation. 10.2: Legal and Statutory Risk: This risk primarily arises on non-compliance with any legal/ contractual / statutory provisions. Radisys India bea....
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....eduling is limited by the requirements of its Associated Enterprise. Accordingly, we may characterize Radisys India as a 'Contract Service Provider' for development and support of software development services and marketing support services provided to its Associated Enterprise" Based on the above, we shall under take the comparability of those comparables sought for inclusion/exclusion by assessee before me. 4. Ground No.1 raised by the assessee leads to the challenge of validity of the final assessment order passed to be beyond the time prescribed under section 144C(13) of the Act. The Ld.AR submitted that order of the DRP is dated 31.12.2021 and the Ld.AO passed the final assessment order on 28.2.2022, which is beyond the period of limitation. On a query being raised asking for the date of receipt of DRP directions by the National Faceless Assessment Centre, the assessee did not have any evidence to place in order to substantiate its plea of a belated order passed by the Ld.AO. We are therefore, are not inclined to decide this issue and hence, the same is dismissed. 5. Ground Nos.2 to 5 raised by the assessee are general in nature and therefore, do not requir....
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....te that the assessee has a turnover under software development service segment at Rs.1,59,43,94,173/-. It is also noted that the Ld.TPO has excluded from the list of comparable companies, chosen by the assessee in the TP study, whose turnover was less than Rs.1 crore. The contention of the assessee is that, as the Ld. TPO excluded companies with a low turnover, he failed to apply the same yardstick to exclude companies with a high turnover. From the submissions of the assessee, we note that the comparables sought for exclusion on turnover filter is more than Rs.200 crores as follows: 1) Larsen & Toubro Infotech Limited - Rs.6,183 Cr. 2) Persistent Systems Limited - Rs.1,732 Cr. 3) Tata Elxsi Limited - Rs.1,201 Cr. 4) Infosys Limited - Rs.59,257Cr. 5) Cybage Software Private Ltd. - Rs.759 Cr. 6) Nihilent Technologies Ltd. - Rs.259 Cr. 7.4. It is also an admitted position that coordinate bench of this Tribunal in assessee's own case in IT(TP)A No.2482/Bang/2019 dated 22.2.2022 excluded comparables with high turnover and have been consistently following the turnover range of Rs.1 to 200 Crores....
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....ware Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt. Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): "41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the riv....
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.... to correct and such action does not call for any interference." 13. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Banglore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Co....
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....m. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 14. In view of the aforesaid decision, we hold that 7 companies listed in Sl.No.1,2,4,6,7, 10 and 11 of Grd.No.1 raised by the Assessee whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies." 7.5. In view of the above decision in asses....
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....om the final list of comparables. For the purpose of ready reference, the relevant paragraph is reproduced below: " 18. We have heard the rival contentions and perused the record. The first aspect is the functional comparability of concern which has been finally selected to be comparable. In respect of Infobeans Systems Pvt. Ltd., the financials of said concern clearly reflect that in addition to providing software development services to its associated enterprises, it had also earned foreign exchange from export of goods on FOB basis. The event of export of goods was also mentioned in notes and also in the Profit and Loss Account, where revenue from sale of software was declared. The segmental details of two activities carried on by the said concern were not available and in the absence of the same, the concern could not be equated as functionally comparable to a concern which was providing software development services to its associated enterprises. Applying the same set of reasoning as in the paras hereinabove, we hold that Infobeans Systems Pvt. Ltd. is not comparable to the assessee". 22. Respectfully following the same, we direct that Infobeans be excluded f....
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.... earned revenue of Rs.8,00,53,350/- from it's AE. From this it is clear that this company is rendering services to non-AE customers also, whereas the assessee before us is a captive service provider only catering to the requirements of its AE. Under such circumstances we do not deem it fit to be considered in the final set of comparables. Accordingly, this comparable is directed to be excluded. (ii) Cygnet Infotech Pvt. Ltd. 8.5. The Ld. A.R. submitted that this company is engaged in the business of providing Enterprise Solutions, Application Content Management Services and IT Enabled Services. This has been observed by the DRP also. The Ld.AR thus submitted that, the activities performed by this comparable is basically in the ITES segment, and therefore cannot be compared with the software development service provider. In support the Ld.AR relied on page 2033 of the paper book where the annual report of his company is placed. 8.6. On the contrary the Ld.DR relied on the order passed by the authorities below. We have perused the submissions by both sides in light of records placed before us. 8.7. In the annual report it is mentioned that this company derives reven....
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....aper book submitted that this comparable is into advertising services, selling of place for advertisement in printing media and public relations. It is also submitted that, it has incurred a huge service cost of about Rs.37,11,57,227/-, which is almost 89% of the total cost. The Ld.AR submitted that, the details of these expenses are verifiable from the P&L account at page No. 4057 of the paper book. Referring to the schedule for revenue recognition at page 4066 of the paper book, the Ld.AR submitted that, these expenses are excessive in nature. The Ld.AR submitted that, the entire revenue generated by this company has been shown as advertising services which is not akin to marketing support services rendered by the assessee before us. 12.2. On the contrary, the Ld. DR relied on the observations of the DRP. 12.3. We have perused the submissions advanced by both the sides in the light of records placed before us. From the Director's report at page 4045 of PB, we note that the business over view of this company is shown to be advertising, public relation, design and digital. As there is no segmental details available, it is difficult to analyse the revenue generated by this com....
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....he assessee is merely acting as an agent facilitating the convenience of payments for employees and the AE. 15.1. The Ld.AR pointed out that this transaction has been reported in Form 3CEB and that it does not have any impact on P&L account. The Ld.AR thus submitted that, this expenditure cannot be held to be an operating cost in the hands of the assessee and the 15% of discount given to the employees cannot be treated as cost in the hands of the assessee being borne on behalf of the Radisys Corporation, USA. 15.2. Referring to the DRP's directions for assessment year 2018-19, the Ld.AR submitted that, this cost has been held to be belonging to the AE and it does not form part of the operating cost of the assessee. He also submitted that the DRP for AY 2018-19 observed that, the AE has not been cross charged to the assessee and the cost of the benefit is given to the employees directly, that is borne by the AE. 15.3. Alternatively, the Ld.AR submitted that, in the event the expenditure is treated as an operating cost, then the same needs to be treated as operating revenue as well. This is submitted on the presumption that the AE has cross charged the cost to the assessee. ....
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....ce with the provisions of Section 8 hereof. The Company shall issue a separate certificate or certificates with respect to each Option exercised by an Optionee. (b) In the Committee's discretion, payment of the purchase price for the shares with respect to which the Option is being exercised may be made in whole or in part with shares of Common Stock of the Company. If payment is made with shares of Common Stock, the Optionee, or other person entitled to exercise the Option, shall deliver to the Company certificates representing the number of shares of Common Stock in payment for the shares being purchased, duly endorsed for transfer to the Company. If requested by the Committee, prior to the acceptance of such certificates in payment for such shares, the Optionee, or any other person entitled to exercise the Option, shall supply the Committee with a representation and warranty in writing that he or she has good and marketable title to the shares represented by the certificate(s), free and clear of all liens and encumbrances. The value of the shares of Common Stock tendered in payment for the shares being purchased shall be their Fair Market Value on the date of the Op....
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.... of the Board of Governors of the Federal Reserve System and any other governmental agency having jurisdiction." 15.6. On plain reading of clause 9 above, it is clear that, the employees to whom the option is extended are required to make the payment towards the subscription of such shares of the AE directly. Further, the assessee before us has issued "Employee Information Supplement India", which is specific to the employees of present assessee in India. For the sake of convenience, we scan and reproduce the same as under: 15.7. From the above it is clear that, no cost is charged to the assessee, and that the employees of the assessee is informed regarding the taxability of the option exercised by the employee. On perusal of the financials, it is noticed that, nothing has been debited as ESOP expenses. 15.8. We note that, the Ld.TPO has mentioned regarding treatment of ESOP's cost by an Israili company as under: "In two cases, Supreme Court of Israel held that whatever an Israeli company is remunerated at cost plus mark up by foreign affiliate for services the cost base should include ESOPs issued by foreign affiliate to Israeli company. In the instant cases, the....
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....bility of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C . 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) to (d) (e)transactional net margin method, by which,- (i)the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in....
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....ts of such differences. 11. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 12. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.473.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of....
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.... * A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) * This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures. (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the teste....
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....eyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO Vs. E Value Serve.com (2016) 75 taxmann.com 195(Del-Trib) has 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 adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same fo....
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....one of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly." 16. Respectfully following the aforesaid decision, we hold that the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly." In view of above, we direct the Ld.AO/TPO to grant working capital adjustment. Accordingly, this ground raised by the assessee stands allowed. 17. Ground No.18 is in respect of risk adjust....
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....ontribution of the employees' share to their credit with the relevant fund is to be treated as deduction (Section 36(1)(va)). The other important feature is that this distinction between the employers' contribution (Section 36(1)(iv)) and employees' contribution required to be deposited by the employer (Section 36(1)(va)) was maintained - and continues to be maintained. On the other hand, Section 43B covers all deductions that are permissible as expenditures, or out-goings forming part of the assessees' liability. These include liabilities such as tax liability, cess duties etc. or interest liability having regard to the terms of the contract. Thus, timely payment of these alone entitle an assessee to the benefit of deduction from the total income. The essential objective of Section 43B is to ensure that if assessees are following the mercantile method of accounting, nevertheless, the deduction of such liabilities, based only on book entries, would not be given. To pass muster, actual payments were a necessary pre-condition for allowing the expenditure. 53. The distinction between an employer's contribution which is its primary liability under law - in terms of Section 36(....
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....nt which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non-obstante clause under Section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee's contribution on or before the due date as a condition for deduction. 55. In the light of the above reasoning, this court is of the opinion that there is no infirmity in the approach of the impugned judgment. The decisions of the other High Courts, holding to the contrary, do not lay down the correct law. For these reasons, this court does not find any reason to interfere with the impugned judgment. The appeals are accordingly dismissed. 18.2 In view of the above decision by Hon'ble Supreme Court, we hold that the employees contribution to PF and ESI should be remitted before the due date as per explanation to section 36(1)(va) i.e. on or before the due date under the relevant employee welfare legislation like PF Act, ESI Act etc., for the same to be otherwise allowable u/s.43B. We th....
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....nologies Ltd. 19.88 26.47 67.57 29.93 15 Cygnet Infotech Pvt. Ltd. 25.24 30.45 36.61 30.19 17 Infosys Ltd. 38.79 38.30 41.40 39.50 Threesixty Logica Testing 18 36.63 48.46 42.02 41.94 Services Pvt. Ltd. 19 Cybage Software Pvt. Ltd. 41.89 62.90 68.68 57.82 20 Consilient Technologies Pvt. 54.85 71.82 69.51 65.14 Ltd. 35th Percentile Median 21.24 26.18 Document 5 Sl. No. Company Name 2016-17 65th Percentile MSS Segment F.Year wise OP/OC (%) 2015-16 Wt. Average 2014-15 26.46 AVERAGE Sl. No. Company Name OP/OC15 OP/OC16 OP/OC17 OP/OC 1 Goldmine Advertising Ltd. 5.21% 6.12% 5.71% 5.68% 2 Pressman Advertising Ltd. 15.93% 14.96% 24.95% 18.62% Scarecrow 3 Communications Ltd. 27.91% 19.93% 6.29% 18.04% 4 Ugam Solutions Pvt. Ltd. 14.06% 7.88% 6.72% 9.55% Majestic Research 5 Services & Solutions Ltd. 17.74% 35.90% 46.05% 33.23% Average 17.02% Document 6 Sl. No 1 Description Software development segment Adjustment u/s 9....
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....of the Plan, you are required to hold any Company shares for one year following the date of purchase before you can sell or otherwise transfer such shares. This one year holding period will not affect the timing of the taxable event occurring on the date of purchase as described above, and you will not experience a second taxable event at the time the holding period expires and you are able to sell or otherwise transfer the shares. Sale of Shares When you subsequently sell or otherwise dispose of your Company shares acquired under the Plan, you will be subject to a capital gain tax on any gain you realize from the sale. The amount taxable as a capital gain will equal the difference between the sale proceeds and the fair market value of the shares on the date of purchase. Any gain arising from such sale of shares held for 12 months or less will be treated as ordinary income and subject to taxation at marginal tax rates (including Education cess). Any gain arising from the sale of shares held for more than 12 months will be subject to taxation at a flat rate of 20.6% (inclusive of Education cess of 2% and Secondary and Higher Secondary cess of 1....