TaxTMI 
TaxTMI 
2023 (4) TMI 75
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....ed by the AO u/s 143(3) r.w.s. 144C of the Act incorporating a transfer pricing adjustment on software services of Rs.2,35,51,065/-. Upon appeal to the Tribunal in its order dt.23.06.2017 in IT(TP)A No.1414/Bang/2010 has held on this issue as reproduced hereunder: ''5......Accordingly, the assessment order on entire TP issue is set aside and the matter is restored back to the file of AO/TPO for fresh decision after providing adequate opportunity of being heard to the assessee.'' 2.1 In the set aside proceedings, the assessee filed its submissions on this issue vide its letter dt.12.09.2018. The TPO in the impugned order u/s 254 r.w.s 92CA dt.25.10.2019 has arrived at an adjustment of Rs.2,42,58,140/-. In arriving at the said adjustment, the TPO in para 3.1 has erred in assuming that the Tribunal has only set aside the issue of comparability of the comparable companies selected by the TPO but not objected to the filters adopted by the TPO for selection of comparables. Perusal of the grounds of appeal extracted in the Tribunal order shows that the assessee has raised grounds on filters, comparables among others. Since the Tribunal has set aside the entire matter to the fi....
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.... of software services segment as under: Particulars Rs. Arm's length price 32,34,05,601 Price received 29,91,47,461 Shortfall 2,42,58,140 2.6 The Draft assessment order u/s 143(3) r.w.s 254 r.w.s 144C(1) dated 20.12.2019 was passed by the AO by making the addition of Rs.2,42,58,140/- in respect of TP adjustment in Software segment. Against the Draft assessment order, the assessee filed its objections before the DRP on 17.01.2020. The assessee vide written submissions dated 07.01.2021 filed before DRP on 08.01.2021 has contested for rejection of following comparables interalia its objections on various filters. List of comparable companies contested by the Assessee on various grounds for rejection Sl.No. Name of the Company Grounds of Appeal 1 Aztech Software Ltd * Fails RPT filter 2 Geometric Software Limited * Fails RPT filter 3 Infosys Ltd * Functionally dissimilar - engaged in product development and provision of software developments services * Ownership of brand and IPR * Turnover exceeds 200 crores 4 Kals Information Systems Ltd (seg) * Functionally dissimilar - engaged in software products devel....
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.... 2.7 The Ld. DRP vide its directions u/s 144C(5) of the Act partly allowed the objections of the assessee vide order dated 30.03.2021. The DRP directed the TPO to remove Kals Information Systems Ltd (seg) as a comparable. 2.8 Pursuant to the directions of the DRP, the AO passed the final assessment order u/s 143(3) r.w.s. 254 r.w.s. 144C(1) on 29.05.2021 retaining the addition of Rs. 2,42,58,140/- as per draft assessment order ignoring and without giving effect to the directions of the DRP. 2.9 Against the orders of the authorities, the Assessee has preferred the above appeal before this Tribunal on 15.07.2021 raising the following grounds of appeal. 1. That the order of the Assessing Officer (AO), Transfer Pricing Officer (TPO) and the directions of the Dispute Resolution Panel (DRP) in so far as it is against the appellant is against the law, facts, circumstances, natural justice, equity, without jurisdiction, bad in law and all other known principles of law. 2. That the total income computed and the total tax computed is hereby disputed. 3. That the AO/TPO/DRP erred in not providing adequate and sufficient opportunity as required under law thus....
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....(3). 22. The Learned AO/TPO/DRP erred in considering the following companies as comparables rejecting the submissions/objections made by the appellant. a) Aztech Software Ltd b) Geometric Software Limited c) Infosys Ltd d) Mindtree Consulting Ltd e) Persistent Systems Limited f) R Systems International Limited (Seg.) g) Sasken Communication Ltd (Seg) h) Tata Elxsi Ltd (Seg) i) Accel Transmatics (Seg.) j) Flextronics Software Systems Ltd (seg) k) Megasoft Limited l) Igate Global Solutions Ltd 23. With prior permission of the ITAT, the appellant reserves the right to add/delete/amend any or all the ground stated above. 24. For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the assessee requests that the appeal be allowed as prayed and justice be rendered. 2.10 During the course of hearing the appellant has submitted a chart seeking for exclusion of the following comparables on various grounds (Ground 22): a) Aztech Software Ltd b) Geometric Software Limited c) I....
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....not be compared with the company, whose turnover is less then Rs. 200 Crores. In Coming to the aforesaid conclusion, the Tribunal relied on the decision rendered by the ITAT, Bangalore Bench in the case of Autodesk India P. Ltd., Vs. DCIT (2018) [96 taxmann.com 263] (Bangalore-Trib) reviewing all the conflicting decisions on the point, and concluding that the application of turnover filter still holds good and has not been in any manner diluted by the decision of Hon'ble Karnataka High Court in the case of M/s. Acusis Software (I) Pvt. Ltd., Vs. ITO in ITA No. 223/2017, dt. 14-08-2018, following the relevant observations of the Tribunal, held as under:..'' 3.2 Applying the said decision, the companies having turnover more than Rs.200 crores should be eliminated from the list of comparables as the assessee's turnover is Rs.29.91crores. 3.3 The assessee is seeking exclusion of the following 6 comparables on account of turnover filter. a) Infosys Ltd - Turnover Rs.9028 crores b) Mindtree Consulting Ltd - Turnover Rs.448.79 crores c) Persistent Systems Limited- Turnover Rs.209.17 crores d) Sasken Communication Ltd (Seg) - Turnover Rs.240.03....
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.... 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 Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the....
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....e case of Genisys Integrating (supra)." 5.3 In view of the above, we direct the AO to exclude the above 6 companies from the list of comparables whose turnover is more than Rs.200 crores in the assessment year under consideration since the turnover of the assessee company in Rs.9,91 crores in AY 2006-07. Ground 22 - 6. The assessee is seeking exclusion of the following 3 comparables on account of RPT filter. a) Aztech Software Ltd - 17.78% 6.1 The excerpts of the RPT transactions from the annual report are provided below for ease of reference. b) Geometric Software Limited - 19.98% 6.2 The excerpts of the RPT transactions from the annual report are provided below for ease of reference. k) Megasoft Limited - 17.08% 6.3 The excerpts of the RPT transactions from the annual report are provided below for ease of reference 6.4 The TPO has considered threshold limit of 25% for Related party transactions. The DRP has upheld the reasoning of the TPO and stated that the limit of 25% is appropriate and rational. The threshold limit adopted by the Bangalore ITAT is 15% of the sales. The Bangalore Tribunal in the case of FCG Software Services (India) (P) Ltd vs ITO....
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....a comparable on the ground of functional dissimilarity. Relevant portion from DRP directions is extracted as under: 9.2 However, the AO/TPO did not give effect to the same in the final assessment order. There is no appeal by the department against the direction of the DRP. Hence Ld. A.R. requested that the same be removed from the list of comparables. 10. We have heard both the parties and perused the materials available on record. The AO/TPO has to give the effect to the findings of Ld. DRP and he cannot deviate from such direction of the Ld. DRP. Accordingly, we direct the AO/TPO to pass the final/TPO order in conformity with the Ld. DRP order. Directed accordingly. b) Tata Elxsi Ltd (Seg) 11. Regarding this comparable, the assessee has made the following submissions before TPO and DRP: 11.1 Tata Elxsi is predominantly engaged in product designing services and not software development services provider. Hence, Tata Elxsi cannot be compared to the Assessee. Although the Company has a segment called software development segment, the segment is engaged in embedded product design services and Animation Visual Effect Services, which are different from software developme....
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....e for customers who look for solutions through embedded software • Visual computing labs - content development and animation services • Innovation design engineering - product design and engineering '' 11.7 The Ld. DRP has rejected the submissions of the assessee summarily and the directions given are not relevant and is clear case of lack of application of mind. The same is extracted as under: 11.8 The assessee placed reliance on the following decisions where Tata Elxsi was rejected as comparable on the basis of functional dissimilarity. Tesco Hindustan Service Centre Pvt Ltd vs The Deputy Commissioner of Income-Tax in IT(TP).A No.1317/Bang/2010 dt.26.05.2015 for AY 2006-07 - relevant paras 17 & 18 is extracted hereunder: ''17. As far as Tata Elxsi Ltd., a comparable chosen by the TPO is concerned, it was held in the case of 3DPLM Software Solutions Ltd., (supra) that this company is functionally different from a pure software development service provider such as the Assessee and it should be excluded for comparability purposes. 18. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from th....
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....at comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable." 23. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO.'' 13.1 In view of the above order of the Coordinate Bench, we inclined to direct the AO to exclude Tata Elxsi Ltd. from the list of comparables. c) Accel Transmatics (Seg.) 14. The assessee has made the following submissions before TPO and DRP: ''Functionally diversified 14.1 The company's annual report states that the company is engaged in three divisions namely - Transmatic systems (R&D, products and solutions for customer interfacing for banks, utilities etc.) - Ushus Technologies is an offshore development center engaged in sale of IP from software product called 'prodigy' - Accel IT academy - Engaged in IT Training in Hardware and networking enterprise. The screenshot of the annual report of Accel is provided as below: 14.2 From the above screen shot, it is clear that Accel is engaged in the busines....
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....as under: 14.8 The assessee placed reliance on the following decisions of Bangalore Tribunal where Accel Transmatics was rejected as comparable on the basis of functional dissimilarity. Tesco Hindustan Service Centre Pvt Ltd vs The Deputy Commissioner of Income-Tax in IT(TP).A No.1317/Bang/2010 dt.26.05.2015 for AY 2006-07 The above decision has been followed in the case of FCG Software Services (India) (P) Ltd vs ITO in ITA No.1447/Bang/2010 dt.08.01.2016 for AY 2006-07 - 176 TTJ 145 - relevant paras 18 to 20. 14.9 Thus, based on the above case-laws, it can be seen that Accel is functionally dissimilar to that of the assessee as it is engaged in diversified activities such as Accel IT and Accel animation services for 2D and 3D Technologies whereas the assessee is engaged in providing software services to its AE's. Hence the assessee requests that Accel Transmatics be rejected and removed from the list of comparables. 15. The Ld. D.R. relied on the order of the lower authorities. 16. We have heard both the parties and perused the materials available on record. This comparable considered as not comparable in the case of Tesco Hindustan Service Centre Pvt Ltd vs The....
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....The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing sof....
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.... the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the IT(TP)A No.1317/Bang/2010 ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables." 13. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Trilogy E-Business Software India Pvt. Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Trilogy E-Business Software India Pvt. Ltd.(supra), we direct that the said companies be excluded from the list of 22 comparable arrived at by the TPO.'' 16.1 In view of the above decision of the Tribunal, we inclin....
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....l equipment"), provision of engineering and software services and distribution of medical diagnostic imaging equipment, therapy equipment and life sciences products ("medical products"). For the impugned year the entire matter was restored by the Tribunal vide order in IT(TP)A 340/Bang/2017 dated 31.08.2017 to the file of AO/TPO for readjudication in the light of the findings given in earlier years. 21. The following additions have been made by the Assessing Officer on which the assessee is in appeal: Particulars As per Final Assessment order (Rs.) As per Draft Assessment order (Rs.) Transfer Pricing adjustments: 1135625171 1135625171 Royalty 126467850 126467850 Interest in Intra group trade advances 5181085 5181085 Distribution segment 913962617 913962617 Software Development segment 90013619 90013619 Other Issues: Provision for obsolescence of inventory 24997530 24997530 Loss on exchange fluctuation 138526037 138526037 Provision for sales tax and customs duty 9221561 9221561 Disallowance of Legal and Professional fees 219500000 219500000 Provision for expenses (d....
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....TPO/AO for reconsideration of the same in the light of the directions of the Tribunal for the Assessment years 2002-03 to 2004-05 (supra). Further in case no comparable is found in respect of royalty payment by the assessee then the TPO/AO may consider the royalty payment as part of the international transactions under trading segment and then determine the ALP by considering the royalty as part of operating cost for the purpose of computing the margin in the trading segment.'' 22.2 For the impugned year this issue was restored by the Tribunal vide order in IT(TP)A 340/Bang/2017 dated 31.08.2017 to the file of AO/TPO for re-adjudication in the light of the findings given in earlier years. In the set aside proceedings, the TPO has considered the following comparables used for benchmark in the Equipment segment: Sl.No Company name R&D Exp Royalty/ trademark Net sale Margin oversale 1 Maestros Mediline Systems Ltd. (Seg.) 0 0 27,89,93,850 0% 2 Advanced Micronic Devices Ltd. (Seg.) 0 0 40,38,35,468 0% Average 0% 22.3 From the above, it can be seen that the AO/TPO has chosen M/s. Ma....
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....parable is not found in respect of payment of royalty by the assessee, then the TPO/AO may consider the royalty payment on part of the international transaction under trading segment and determine the ALP by considering the royalty as part of operating cost for the purpose of computing the margin in the trading segment. Before us, Ld. A.R. submitted that if it is considered as operating cost, then the margin of the assessee is higher than the margin of comparable i.e. M/s. Advance Micronic Devices Ltd. In our opinion, the AO has to consider this royalty payment as an operating cost and has to verify whether the margin of assessee is higher than the margin declared by the comparable company i.e. M/s. Advance Micronic Devices Ltd. and decide accordingly. In view of this, the issue in dispute is set aside to the file of AO/TPO for the limited purpose for comparison of margins with the comparable company and decide accordingly.'' 22.7 In view of the above, the Ld. A.R. submitted that addition requires to be deleted in line with the orders of the ITAT mentioned supra. 23. On the other hand, the Ld. D.R. submitted that issue may be remitted to the AO/TPO on similar direction as abo....
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....erest charged in a similar transaction. The assessee prays for deletion of the interest adjustment proposed on the alleged outstanding balance of Rs. 11,05,41,602/- as it is not based on facts, law and IT Act. 26. The Ld. D.R. relied on the order of the lower authorities. 27. We have heard both the parties and perused the materials available on record. The primary objection of Ld. A.R. is that the advance has been made in earlier year and a portion of it is not recoverable for which the assessee provided the provision for doubtful loans and advances. However, AO/TPO considered the entire advances for computing the interest on intra-group trade advances. In our opinion, the argument of Ld. A.R. is justified. The provision for doubtful loans and advances cannot be considered for computation of interest on intra-group trade and advances as the recovery of the principal itself is doubtful. Hence, we direct the AO/TPO to consider net advances after deducting provision for doubtful loans and thereafter apply LIBOR+2% as held by Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd. in IT(TP)A No.397/Bang/2021 dated 21.1.2022 for the AY 2016- 17, wherein it was h....
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....ble Supreme Court vide order, in CC No. 4956/2017. 23.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances. 23.4. On the contrary Ld.CIT.DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of the contentions, he placed reliance on decision of Delhi Tribunal order in Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that: ....
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....in light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. Insofar as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing-up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. 23.7. 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 this Tribunal in case of Special Bench of ITAT in case of Instrumentation Corpn. Ltd. v. Asstt. DIT (IT) [2016] 71 taxmann.com 193/160 ITD 1 (Kol. - Trib.), held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per Expl....
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....tional transaction and the same is required to be benchmarked independently as held by the Hon'ble Karnataka High Court in PCIT v. AMD (India) Pl. Ltd., ITA No.274/2018 dated 31.8.2018. 37. Once we have held that the transaction between the assessee and AE was in foreign currency with regard to receivables and transaction was international transaction, then transaction would have to be looked upon by applying the commercial principles with regard to international transactions and accordingly proceeded to take into account interest rate in terms of London Inter Bank Offer Rate [LIBOR] and it would be appropriate to take the LIBOR rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd., 99 CCH 0070 (Mum HC). It is ordered accordingly." 27.1 Accordingly, this issue remitted to the file of AO/TPO for recomputation of interest on intra-group trade advances. Ground No 15 - Distribution segment - Rs. 91,39,62,617/- 28. Wipro GE markets, distributes and services the complete range of GE's medical diagnostic imaging and therapy equipment in the Indian market. Based upon customer requirements, Wi....
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....e assessee filed its written submissions before DRP on 11.01.2021 emphasizing on the binding decisions of the Tribunal in assessee's own case for earlier years. Without appreciating the submissions of the assessee, the DRP passed its directions u/s 144C(5) on 11.02.2021 rejecting the grounds. The AO passed the final assessment order u/s 143(3) rws 254 rws 144C(13) of the Act dated 30.03.2021 retaining the TP adjustment in Equipment segment of Rs.91,39,62,617/- as per draft assessment order. 28.6 The AO/TPO/DRP has erred in not relying on decision of the CIT (A) / ITAT in assessee's own case for the years 2002 - 03 to 2004 - 05, 2005-06, 2006-07 and subsequent orders of the ITAT for other assessment years. The direction of the ITAT to restrict the adjustment to the international transaction i.e, AE purchases has not been adhered to by the TPO. The TPO yet again as was made in the original proceeding has made the adjustment on domestic sales which is not an international transaction. 28.7 The TPO/DRP have adopted TNMM as the MAM to benchmark the transaction. It was submitted to the TPO/DRP that the Tribunal in ITA 810 to 812/Bang/2007 dated 16.05.2008 for the AY's 2002-03 to 20....
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....to be made only in respect of purchases made from the AE and not on the entire transaction in the trading segment. There is no quarrel on this issue that the adjustment on account of transfer pricing can be made only in respect of the international transactions. In the case on hand, the international transactions in trading segment is confined only to the purchases made from the AE. Since there are other transactions of import and procurement from domestic market therefore the adjustment cannot be made by considering the entire trading segment of the assessee. Thus on principle, we do not find any error on these points however, the CIT (Appeals) has undertaken to recompute the margins of the comparable as well as assessee by considering the fresh material which was not available with the TPO/A.O. which it is not permissible to the CIT (Appeals) to do this exercise of recomputation without giving an opportunity to the TPO/A.O. The proper course of action on the part of CIT (Appeals) would have been to ask the TPO/A.O. for remand report by considering all the relevant material. However, the CIT (Appeals) did not choose to issue any remand order but undertaken the entire exercise on h....
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....ifferent view in later year on same set of facts when there was no fresh material before it.'' 28.13 In the impugned year the AE purchases are Rs.541,23,20,773/- in the trading segment. The assessee's margin for the impugned year as calculated by applying RPM method and considering AE purchases as the international transaction in the manner directed/accepted by the Tribunal and lower authorities in earlier years is hereunder: 28.14 In line with the treatment given to AY's 2002-03 to 2004-05, AY 2005-06 & 2006-07 the margin of the assessee has been calculated at 50.11%. As mentioned supra, the TPO for the impugned year has considered M/s.Maestro Mediline Systems Ltd (seg) at a margin of 29.57% and M/s. Advanced Micronic Devices Ltd at a margin of 7.29%, thus average being 18.43%. It may be seen in all the earlier years that M/s. Advanced Micronic Devices Ltd (7.29%) has been consistently considered as a comparable and thus the margin of the assessee at 50.11% being higher than that of M/s. Advanced Micronic Devices Ltd, the adjustment requires to be deleted. 28.15 The assessee has objected to M/s. Maestro Mediline Systems Ltd (seg) being considered as a comparable on variou....
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....ons. The services pertain to the development of software, which is vital in terms of the functionality of the medical products manufactured by GEHC. The services rendered are in the nature of coding to subsystem work and providing image solutions as well as IT service solutions including base support, business, product and infrastructure software across all technologies and home grown or purchased software. It also includes expertise in various technologies, implementation, monitoring and support of IT infrastructure and software solutions. Wipro GE also carries on operations by way of providing online support and developing support platforms. 31.2 Wipro GE provides engineering services including valueengineering services for Wipro GE product design and solving Wipro GE Global's customer related design problems and issues. The services are in the nature of providing engineering drawing/designs (both 2D and 3D models) by using software like CAD, CAM etc. Wipro GE does not create any engineering software but utilizes the engineering software to generate designs/drawings. The Margin of the Assessee as computed by the TPO in the TP Order Total revenue 92,79,15,217 Total ....
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....aft assessment order. 31.8 Before the Tribunal the assessee has filed a chart seeking exclusion/inclusion of comparables on various grounds. The same are outlined hereunder. 31.9 The assessee is seeking exclusion of the following comparables: 1. Datamatics Global Services Ltd, 2. Infosys Ltd, 3. Larsen & Toubro Infotech Ltd, 4. Mindtree Ltd, 5. Persistent Systems Ltd, 6. R S Software (India) Ltd, 7. Spry Resources India Pvt Ltd The assessee is seeking inclusion of the following comparables: - 1. Akshay Software Technologies Ltd 2. Cades Digitech Pvt Ltd 31.10 However, at the time of hearing, below mentioned comparables are not pressed. 1. CG VAK Software & Exports Ltd, 2. R System International Ltd, 3. Sonata Software Ltd : Accordingly, these comparables are dismissed as not pressed. 31.11 On the issue of turnover filter, the TPO has excluded companies having turnover of less than 1crore. It is the view of the TPO that the exclusion of comparables on the basis of size and turnover of the companies is not justified in view of the judgment of Hon'ble Delhi High Court in Chryscapital Investment Advisors India (P) Ltd....
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....ssessee is seeking exclusion of the following 6 comparables on account of turnover filter. a) Infosys Ltd - Turnover Rs.31254crores b) Larsen & Toubro Infotech Ltd - Turnover Rs.2959.55 crores c) Mindtree Ltd - Turnover Rs.1255.80 crores d) Persistent Systems Limited - Turnover Rs.810.36 crores e) R S Software (India) Ltd - Turnover Rs.247.14 crores 31.15 The turnover of the above companies are far higher than that of the assessee company. Since the assessee falls under category of companies having turnover less than Rs.200crores, the above comparables needs to be excluded. 32. The Ld. D.R. made submission as in the AY 2006-07. 33. We have heard both the parties and perused the materials available on record. As discussed in AY 2006-07, in ITA No.344/Bang/2021, the turnover of these companies is more than Rs.200 crores. These 5 companies listed in above para (a) to (d) are excluded from the list of comparables by applying the turnover filter as the turnover of assessee company was Rs.92.29 cores (software development segment). 34. Regarding the comparable Datamatics Global Services Ltd, the DRP vide order dated 11.02.2021 dire....
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....f the Tribunal order in the case of Applied Materials India Pvt. Ltd. in IT(TP)A No.1838/Bang/2016 dated 5.2.2020 for AY 2012-13, the Ld. DRP itself excluded Spry Resources India Pvt. Ltd. from the list of comparables. Accordingly, in the present case also we direct the AO/TPO to exclude Spry Resources India Pvt. Ltd. from the list of comparables. 41. The assessee has sought for inclusion of the following companies: 1) Akshay Software Technologies Ltd - 2) Cades Digitech Pvt. Ltd. 41.1 The Ld. A.R. submitted regarding this comparable as follows:- Akshaya Software Technologies Ltd - 41.2 This company has been considered as a comparable in the TP report by the assessee. The TPO proposed to reject this as a comparable on the basis of functional dissimilarity. The assessee objected to the rejection by providing a copy of the annual report of the company and stating that the company is engaged in providing software services and also passes all the filters of the TPO. However, the TPO rejected this as a comparable in the TP order on the reason of functional dissimilarity. The reason as stated by the TPO in his order is extracted hereunder: ''Akshay ....
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....e Technologies Ltd. in the list of comparables for determining the ALP of international transactions. Cades Digitech Pvt Ltd - 44. This company has been considered as a comparable in the TP report by the assessee. The TPO proposed to reject this as a comparable on the ground that no data is available. The assessee objected to the rejection and submitted a copy of the annual report of the company and stated that the company is functionally similar to that of the assessee. However, the TPO rejected this as a comparable in the TP order on the reason of functional dissimilarity. The reason as stated by the TPO in his order is extracted hereunder: ''The company derives its revenues primarily from engineering design services as shown in the Note 17 and Note 24 of the AR. Hence, the company is functionally dissimilar to the taxpayer and therefore rejected.'' 44.1 The assessee filed objections before DRP seeking inclusion of the said company, however DRP upheld the action of the TPO and rejected the prayer of the assessee. 44.2 The assessee submits that the said company has been selected as functionally comparable by the Pune Tribunal in the case of DCIT vs Applied Mic....
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....been drawn to the annual report for financial year 2010-11 and reference is made to the details at pages 235, 238, 239 and 240 of the Paper Book to point out that the figures of earlier year are available in the Profit and Loss Account, Balance Sheet and even in the Notes to accounts. He further pointed out that this year details are available in public domain, may be, not at that relevant time. He further pointed out that the TPO himself in assessment year 2013-14 had taken the said concern as comparable. We find merit in the plea of assessee, in view of information available in public domain and accordingly, we direct the TPO to include Cades Digitech Pvt. Ltd. as comparable in the hands of assessee and re-work the mean margins of external comparables and also determine the arm's length price of international transactions. Before parting, we may also refer to the transfer pricing order for assessment year 2013-14 in assessee's own case, wherein Cades Digitech Pvt. Ltd. was considered as comparable for design engineering segment. Further, the Delhi Bench of Tribunal in Bechtel India Pvt. Ltd. Vs. DCIT in ITA No.1478/Del/2015, relating to assessment year 2010-11, order date....
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....12.01.2021 - PB-III page 637 to 658. 47.4 Without prejudice, if the obsolescence in stocks is not allowed then it results in the enhancement in the value of closing stock and AO should allow the same as cost by reckoning higher value of the opening stock. The AO while disallowing ought to have allowed what has been disallowed in the earlier years as opening stock. However, as a principle of consistency the claim of the assessee being factually and legally correct, the disallowance is uncalled for. 47.5 The argument of the AO that similar amount has been disallowed under MAT computation is not relevant. The assessment in this case has not been made under MAT. The assessee reserves the right to seek exclusion of this as and when the assessment is made under MAT, till then this becomes a non-issue. In any case if a deduction is allowable in law, the same cannot be denied on the plea of estoppel as the assessee is entitled to rectify its stand. Further no addition can be made on the basis of admission or estoppel or any other equitable doctrine. If an item is taxable same would be taxable irrespective of what the assessee may say or may not say. In this regard, reliance is placed....
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....isallowance of write off of obsolete stock of Rs.1,18,69,458/-. The assessing officer during the course of assessment proceedings of AY: 2004- 2005 called for item wise details of the obsolete stock written which was furnished by the appellant a copy which is also submitted during the course of hearing before me along with the written submissions. The AO has disallowed the same on the ground that date of purchase has not been furnished and how the same has become obsolete. It was submitted that the stock was written off as obsolete due to lack of demand for the said stock and technological changes in the products. That the stock written off when compared to the turnover of the appellant was very negligible, its accounts were audited and on the advice of its technical team and auditors, the same has been treated as obsolete and written off in the books. The disallowance has been made for unsustainable reasons and prayed for deletion of the disallowance in the interests of justice. I have looked into the discussion on this issue in the assessment order and the details submitted. After considering the same, I am of the view, there is no case for any disallowance when the deta....
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....f re-appreciation of evidence and upsetting the finding of fact as to whether the stock had become obsolete or not. It is true that one of the mode as to whether stock had become obsolete or not may be, the consideration of the date of purchase of the stock, but the same is not the only criteria, and there could be other criteria including that of the advice of the technical team, auditor, etc. The CIT (A) has found that not only the stock which is written off is very negligible in comparison to the total turnover, but the same was audited and upon the advice of the technical team of the auditor, the stock is written off. In our view, sufficiency of evidence cannot be invoked, as sought to be canvassed, that too, for upsetting the finding of fact, for which the Tribunal is the ultimate authority. Under these circumstances, we find that while considering the question (b), it cannot be said that such is a substantial question of law as sought to be canvassed. Hence, need not be answered.'' 49.1 In view of above judgement of High Court, we are inclined to decide the above issue in favour of assessee. Ground No 18 - Loss on exchange fluctuation - Rs. 13,85,26,037/- 50. The ass....
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.... of whether there is a gain or loss. 50.3 The issue is covered in favour of the assessee by the decision of Bangalore Tribunal in the case of Quality Engineering and Software Technologies Pvt Ltd vs DCIT - ITA 257 & 275/B/2014 dt. 14.11.2014 (PB-II page 346 to 375 ) 50.4 The issue is covered in favour of the assessee by the decision of ITAT Bangalore in the case of Bharat Mines and Minerals vs DCIT - ITA 2378 & 2379/B/2018 dt.30.03.2022 - (PB-III page 672 to 684) 50.5 In view of the said decisions, the addition has to be deleted. 51. The Ld. D.R. submitted that this loss is notional and contingent in nature. As per CBDT instruction No.3/2010, even actual losses i.e. hedge loss are allowable as non-speculative only if the transaction quality under clause D of the proviso to section 43(5), "Marked to Market" losses claimed as notional losses prior to settlement has to be treated as speculative loss in terms of section 43(5) of the Act. 52. We have heard both the parties and perused the materials available on record. This issue has been considered by Coordinate Bench in the case of Bharat Mines and Minerals Vs. DCIT in ITA No.2378 & 2379/Bang/2018 dated 30.3.2022, wherein ....
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....he Act. Again, in view of the fact that both delivery transactions and derivative transactions are non-speculative as far as Section 43(5) is concerned, it follows that both will have the same treatment as far as application of Explanation to Section 73 of the Act is concerned. Therefor aggregation of the trading profit and loss from derivative transactions should be done before Explanation to Section 73 of the Act is applied. The above view was taken by the Special Bench of the Mumbai Tribunal in the case of CIT vs. Concord Commercial Pvt. Ltd. (2005) 95 ITD 117 (Mum) (SB). In this case the Special Bench held that: "Before considering whether the assessee's case is hit by the deeming provision of Explanation to Section 73 of the Act, aggregate of the business profit/ loss has to be worked out based on the non-speculative profits: either it is from share delivery or from share derivative." From the above it is concluded that both trading of shares and derivative transaction are not coming under the purview of Section 43(5) of the Act which provides definition of "Speculation" exclusively for the purpose of section 28 to 41 of the Act. Again, the fact that both....
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....uidelines permitted hedging to the extent of last three years annual average turnover, or current year's actual export turnover whichever is higher. Where exact amount of underline transaction was not ascertainable according to RBI guidelines, the contracts could be booked on the basis of reasonable estimate. The assessee has taken its hedging position in accordance with the guidelines of RBI and the same is not disputed. (ix) The claim of the assessee was that the underlying exposure in respect of foreign currency is more than adequate to cover the hedging positions taken in respect of cross currency derivative contracts entered into by the assessee. The Revenue has not brought out any material on record to controvert to this claim of the assessee. (x) The forex derivative transactions transacted by the assessee are through banks in compliance with the RBI regulations. These regulations permit the assessee to enter into such derivative transactions only by fulfilling certain conditions in the course of the business of the assessee. These regulations do not permit the assessee to enter into forex derivative contract as a separate business. (xi) Sectio....
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....ve transactions made by the assessee through Government recognized channel, otherwise the RBI would not have entertained these transactions and would have restrained the banks from entering into such transaction with its clients. Thus, considering the totality of the facts and circumstance of the case and the decisions relied upon herein above we allow the grounds raised by the assessee's on this issue in both appeals in favour of the assessee and accordingly we hereby direct the Revenue to set off the losses incurred by the assessee on account of forex derivatives contracts against the business income of the assessee. 16. In the result, the appeals filed by the assessee are allowed." 52.1 In view of the above order of the Tribunal, we allow this ground taken by the assessee. Ground No 19 & 20 - Provision for sales tax and customs duty - Rs. 92,21,561/- 53. The assessee has created provision for sales tax and customs duty amounting to Rs.92,21,561/-. The assessee has already added back this amount while computing the total income under regular provisions of the Act. The AO has added the amount to book profit u/s 115JB of the Act on the premise that it is an un....
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....scertained liability towards provision for leave encashment etc., unless the amount is actually paid before the due date. However, in the computation of book profit u/s 115JB, deduction is available for such provision of ascertained liability. The ld. DR has not drawn our attention towards any part of the provisions of section 115JB, which makes the provisions of section 43B(f) applicable to the computation of book profits. As the ground raised by the Revenue is only against the deletion of addition in the computation of book profit u/s 115JB, the impugned order needs to be upheld. It is however, made clear that if the income under the normal provisions of the Act turns out to be more than the book profit u/s 115JB and the total income is to be computed as per the normal provisions, then no deduction for such provision would be admissible unless the amount of such provision is paid before the due date u/s 139(1) of the Act. 54.1 In view of the above discussion, we set aside the issue to the file of AO to pass fresh order in conformity with the decision of coordinate Bench of Delhi in case of NHPC Ltd. cited (supra). Ground No 21 - Disallowance of Legal and Professional fees -....
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....isite details. In the present case, assessee produced the recipient's details along with details of TDS and other evidence supporting the claim. Had the AO have any doubt, he should have made further enquiry by summoning the respective party, which he failed to do so. Hence, in our opinion, the expenditure cannot be disallowed only on surmises and conjectures. Accordingly, we allow the ground taken by the assessee. Ground No 22 - Provision for expenses (disallowed as Contingent Liability) - Rs. 40,00,000/- 58. The assessee has made provision for litigation amounting to Rs. 40,00,000/-. The AO has made the disallowance under the premise that assessee was not able to furnish the kind of litigation expenses and nature of litigation. Relevant portion is extracted hereunder: ''15.3 The reply of the assessee is perused. In the said annexure, the assessee has furnished that the contingent liability includes litigation expenses pertaining to three parties. However, the assessee was not able to furnish the kind of litigation expenses and the nature of litigations. Any expenditure not related to earning business income should not be allowable as per the IT Act. In view of the ....
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....ce has been deducted wherever the TDS provisions are applicable. Further the statutory auditors after going through the books and records have in their Tax audit report have certified that TDS has been deducted, hence the assessee pays that no disallowance be made in this regard in the interest of justice. The assessee has been deducting tax at source and has also been filing the required annual/ quarterly returns as per law and requests your honor to kindly verify the factum of deduction of tax at source from the records available with the department...'' 61.1 However the AO has made the disallowance of Rs.13,85,00,000/- for want of documentary evidence. The expenditure towards dealer commission debited in the books is Rs.9,45,00,000/-. The AO has incorrectly taken as Rs.13,85,00,000/- which is the amount reflected for 'foreign exchange loss'. 61.2 The DRP in para 13.2 has stated as under: ''13.2 The assessee has filed to substantiate with documentary evidence before the panel and also before the AO that the expenses have been incurred and they are for the purpose of business of the assessee...'' 61.3 The DRP however sustained the disallowance on the premise that....
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.... are of the opinion that the claim of assessee is to be allowed as genuine. Accordingly, we allow this ground of appeal taken by the assessee.'' 63.1 In view of the above discussion, we allow the ground taken by the assessee. Ground No 24 - Miscellaneous expenses - Rs. 9,97,00,000/- 64. The AO vide notice u/s 142(1) dated 10.12.2019 sought the detail regarding miscellaneous expenses to be furnished in the required format. The assessee submitted the detail sought for in the required format alongwith TDS made vide reply dated 26.12.2019 as extracted hereunder: "The details of Miscellaneous Expenses and the TDS made thereon are enclosed as Annexure-7... Further the statutory auditors after going through the books and records have in their Tax audit report have certified that TDS has been deducted, hence the assessee prays that no disallowance be made in this regard in the interests of justice. The assessee has been deducting tax at source and has also been filing the required annual/ quarterly returns as per law and requests your honour to kindly verify the factum of deduction of tax at source from the records available with the department...'' 64.1 However the AO....
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....any, it is evident that the company is engaged in development of software and software products. Note 6 on page 15 of the Annual Report shows that Inventories of Software Development is Rs 1,27,57,634/- which is significant as rightly pointed out by the assessee. In view of the above, we agree with the contention of the assessee that it cannot be taken as a comparable. The TPO is directed to remove this as a comparable. Document 2 Related party transactions and balances: Name of the party Nature of transactions 2006 2005 Aztec Software Inc. USA Onsite consultancy, sales and marketing services 163,753 161,192 rendered by the subsidiary Outstanding balance as at March 31 212,262 198,176 Disha Technologies Inc. Aztec Disha Technologies Limited Jamcracker Inc.. Revenue from software development services 3,282 7,616 Outstanding balance as at March 31 1,948 7.616 Outstanding balance as at March 31 926 Nil Revenue from software development services 54733 55.866 USA Reimbursement of expenditure of capital nature 928 N Outstanding balance as at March 31 10,736 17,097 ....
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....anagement Personnel: GV Kumar & D Sudhakar Reddy Year ended 31-Dec-2006 Rs 000s Year ended 31-Dec-2005 Rs 000s Subsidiary companies Revenues 157,469 107,736 Receivables Software development expenses 43,696 26,868 Investments in subsidiary companies 15,912 147,331 Loan to subsidiary companies 59,121 24,304 Associate companies Lease rentals & other expenses 1,497 1,247 Due to /(from) Interest paid Loan received Loan repayments 13 1,791 18,427 3,034 25,400 Loan outstanding Loan outstanding (maximum) 3,034 26,434 Directors & Key Management Personnel Remuneration to Executive Directors 4,346 2,899 Professional fees to Non-Executive Director 20 80 Document 5 13.4. Kals Information Systems: On perusal of the annual report of the company, it is evident that the company is engaged in development of software and software products. Note 6 on page 15 of the Annual Report shows that Inventories of Software Development is Rs 1,27,57,634/- which is significant as rightly pointed out by the assessee. In view of the above, we agree with the contention of ....
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....ng trend towards use of reusable components and readymade IP blocks and design frameworks by product manufacturers to enable faster time-to-market and overall reduction in development costs Your Company has invested towards in-house R&D to enable creation of Intellectual Property (IP) and technology expertise in areas such as multimedia, Digital TV, wireless and convergence This technology expertise and IP is expected to contribute to revenues of this division in the following years, through licensing foes and services for integration and customization along with the licensing of these IPs and technologies Your Company will continue to invest in such R&D to help create domain expertise and licensable P within the Company on emerging technologies in the targeted industry sectors. Innovation Design Engineering Services: The business unit (Design Engineering Services) addresses the mechanical product design requirements of its customers, with a strong focus on industrial design and styling Your Company possesses a talented pool of industrial designers and product design engineers, servicing global customers in different industries such as automotive....
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....nt and system integration support segment, the TPO has only considered the software development and services segment for comparison. The exclusion of the system integration and support segment by the TPO renders the company to be functionally comparable. Therefore, the assessee's contention that its functionally different holds no merit as TPO had excluded the product segment in his order. Document 11 Business Divisions TRANSMATIC SYSTEMS Design, development and manufacturing of â–¸ Multifunction Kiosks Queue Management Systems â–¸ Ticket Vending Systems USHUS TECHNOLOGIES ACCEL IT ACADEMY The Next Step for Engineers Offshore development centres for Embedded Software Network Systems Imaging Technologies â–¸ Outsourced Product Development Training services in Hardware and Networking Enterprise Systems Management Embedded Systems â–¸ VLSI Designs â–¸ CAD/CAM/BPO ACCEL ANIMATION STUDIOS Software services for â–º 2D/3D Animation â–ºSpecial Effects Creation Game Asset Development Document 12 Schedules forming part of the financial statements (contd.) (All amounts ....
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....y) Margin as % of sales NOTE-1 These purchases are accessories and small items bought & sold as per the requirement of the customers. No profit margin is envisaged on these purchases as customers themselves can proure these items directly from the suppliers. 34,59,$1,724 69,$1,14,911 9,66,51,57,346 5,41,23,20,773 12,64,67,850 1,54,05,20,022 7,07,93,08,645 2,58,58,48,701 46.69% 26.75% Document 15 WIPRO GE Healthcare Private Limited Notes to the financial statements (continued) 2.13 Long term loans and advances Particulars Security deposit Unsecured, considered good Rental deposits Earnest money deposit Unsecured, considered doubtful Earnest money deposit Less: provision for doubtful deposits Loans and advances to related parties Unsecured, considered doubtful Advance to GE Finland OY, a company under same management Advance to GE Medical Systems Ltd, Bangladesh, a subsidiary Less: provision for doubtful loans and advances As at 31 March 2012 Rs in lacs As at 31 March 2011 344 468 1,945 1,752 76 376 690 376 2,289 2,220 70 1,105 1,105 (1.105....
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....from AEs of Rs.174,93,84,171/- is adopted in making the ALP adjustment towards Trading segment instead of Rs.3128,65,34,719-adopted by the TPO in his order. The Margin earned by Wipro GE Medical Systems is as under: Total Sales of Trading Rs. 3,128,534,719 Document 18 Less: Local Purchases & Imports from Non Affiliates Import Non Affiliates/Local Purchase Other local costs-Installation and warranty Costs, accessories, etc., 608,430,485 200,619.363 Less: Paid to affiliates as purchase price 1.749.384.171 2.558.434.019 Margin earned 570,100,700 Margin as % of purchase 32.59% Margin as % of sales 18.22% The margin earned by Advanced Micronics Devices Limited is as under Trading Sales Less: Purchase of traded goods Margin as % of purchase Margin as % of sales (Rupees in Crores) 27.27 21.03 6.24 29.67% 22.88% As the margin earned by the taxpayer is not less than the TPO's comparable margin, the international transactions are treated as at arm's length. AY-2004-05 As per the directions of the Ld CIT(A), the international transactions from the AEs toward purchases consists of 1. Manu....
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....3,03,64,642 313,56,31,130 Local Purchase Warranty costs, accessories, etc. 52,87,43,408 Less: Paid to affiliates as per purchase price 175,79,64,919 241,70,72,969 Margin carned 71,83,38,161 Margin as % of purchase 3.4 Margin as % of sale 40.87% 29.01% The segmental financial information provided by the comparable company, M/s Advanced Micronic Devices Ltd., for the FY 2004-05, to the Ld. CIT(A) was also examined. Accordingly, the gross profit margin of the Health Care segment of the comparable is recomputed as under: \ Trading Sales Less: Material Cost Rs. (In lakhs) 2684.75 1994.49 68.32 Service charges Power & Fuel Spares & Materials 30.35 2093.16 Margin earned 591.59 Margin as % of purchase 28.26% 22.03% Margin as % of sale As the margin earned by the taxpayer is higher than the comparable's margin as computed above, no adjustment is required in the trading segment of the taxpayer. Document 21 Particulars Total Sales of Trading WIPRO GE MEDICAL SYSTEMS PVT LTD-ASST. YEAR: 2012-2013 Amount (Rs) Amount(Rs) 10,36,32,72,257 Less Local Purchases & Imports....
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....a foreign branch and during the year its total expenditure in foreign currency was Rs 146.55 crore as against total expenditure of the company, which was Rs 214.77 crore. Thus, foreign branch expenses are about 68% of the total expenditure. This shows that major work of the company was onsite and so this Company cannot be considered as functionally comparable to the assessee company, which is operating offshore. This view finds support from the decision of The Hon'ble ITAT, Bangalore in the case of E-Business Software India (P.) Ltd, wherein it is held that 'Thus, assets and risk profile, pricing as well as prevailing market conditions are different in predominantly Onsite companies from predominantly Offshore companies like the taxpayers. Since, the entire operation of the tax payers are taking place Offshore i.e. in India, it is but natural that it should be compared with companies with major operations Offshore, due to the reason that the economics and profitability of Onsite operations are different from that of Offshore business model'. 3.18.1 This company is also rejected as comparable in the original proceedings by the DRP... In view....
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....he method of determination of cost is as follows: Raw materials and components-on a first in first out method. Stores and spares-on a first in first out method. Finished goods-includes costs of conversion. Traded goods- at landed cost on a first in first out method. Document 27 (ii) (iv) Fixed production overheads are allocated on the basis of normal capacity of production facilities. The comparison of cost and net realisable value is made on an item-by-item basis. The net realisable value of work-in-progress is determined with reference to the net realisable value of finished goods. Raw materials and other supplies held for use in production of inventories are not written down below cost except in cases where material prices have declined, and it is estimated that the cost of the finished products will exceed their net realisable value. The provision for inventory obsolescence is assessed on a quarterly basis and is provided as considered necessary. Document 28 For Assessment Year 2012-13 SI Bank No Notional Amount in Rs Trade Date Maturity Date Settlement Amount Loss/Gain 1 SBI 8,74,00,0....