TaxTMI 
TaxTMI 
TaxTMI 
2023 (8) TMI 1170
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....r section 143(3) read with section 144C(13) read with section 144B of the Income-tax Act, 1961 ("the Act") in pursuance of the directions issued by Dispute Resolution Panel (hereinafter referred to as the "Hon'ble DRP"), Bengaluru dated 29 December 2021 under section 144C(5) of the Act inter-alia on the following grounds which are without prejudice to each other: That on the facts and circumstances of the case and in law: General grounds 1. The impugned order of the Ld. AO passed pursuant to the order of the Transfer Pricing Officer - 1(1)(2), Bangalore ("Transfer Pricing Officer" or "Ld. TPO") and the directions issued by the Hon'ble DRP, to the extent prejudicial to the Appellant, is erroneous, bad in law, and contrary to the facts and circumstances of the case. Grounds relating to transfer pricing matters: 2. The Ld. AO has erred in passing the impugned order without following the directions of the DRP, which are binding on the Ld. AO, and accordingly not granting appropriate relief to the Appellant. 3. The Ld. AO/TPO/DRP erred in making an addition of INR 19,65,61,201 to the total income of the Appellant on account of adjustment in the arm's length....
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....ing capital position of the Appellant vis-a-vis the comparable companies. thus acting against the principles laid down in the Rules. 4.6 The Ld. TPO/AO have erred, in law and on facts and circumstances of the case. by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies. 4.7 Without prejudice to the above grounds, the Ld. AO TYPO/DRP erred, in law and in facts, by not N p restricting the value of transfer pricing adjustment to international transactions of the Appellant and thereby making adjustment to third party transactions as well which is against TP principles. Consequential grounds: 5. The Ld. AO have erred in initiating penal proceedings under section 274 read with section 270A of the Act. 6. The Ld. AO have erred in issuing a demand notice under section 156 of the Act. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add. alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribu....
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.... of the case are as under: 4.1 The assessee is a Company said to be engaged in the business of manufacturing optical products and providing after- sales support for Carl Zeiss products in India. The return of income was filed by assessee declaring total income of Rs. 51,79,33,480/. The case was selected for scrutiny under CASS and accordingly, notice u/s 143(2) & 142(1) was issued to the assessee. In response to the notices u/s 143(2) and 142(1), the assessee e-filed the requisite submissions on ITBA incorporating the details called for from time to time. During the course of assessment proceedings, the Ld.TPO found that the assessee had entered into international transaction with Associated Enterprise. Accordingly reference was made to the TPO (Transfer Pricing) u/s 92CA(1) of the Act for the determination of Arms Length Price (ALP) for AY 2017-18. 4.2 The Ld.TPO on receipt of the reference called upon assessee to file requisite details in form 3CEB. The Ld.TPO noted that, the assessee provides after sales support services for Carl Zeiss products in India. The company caters to both domestic and international market. In addition Carl Zeiss India also provides software develo....
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....sales support services segment: The Ld.TPO noted that assessee had selected 8 comparables with a margin of 6.03% and thus treated its transaction to be at arms length, the details of which are as under: 4.4 Disagreeing with the search process carried out by the assessee under all 3 segments, the Ld.AO conducted fresh search and shortlisted the following set of comparables under all the 3 segments as under: A. SWD Sl. No. Company Name F. Year wise OP/OC (%) Wt. Average 2016-17 2015-16 2014-15 1 Rheal Software Pvt. Ltd. -12.27 3.28 3.01 -1.85 2 Kals Information Systems Ltd 1.37 3.97 5.77 3.62 3 Infomile Technologies Ltd. 10.22 9.91 11.12 10.43 4 Harbinger Systems Pvt Ltd 12.28 12.69 17.18 14.1 5 C G-V A K Software & Exports Ltd. 11.65 16.95 17.3 15.09 6 Larsen & Toubro Infotech Ltd. 20.78 19.21 23.98 21.14 7 Great Software Laboratory Pvt. Ltd. 27.18 20.24 10.67 21.24 8 Mindtree Ltd. 20.12 26.11 27.51 24.17 9 R Systems International Ltd. 16.74 31.05 26.44 24.40 10 Persistent Systems Ltd. 25.05 23.95 30.39 26.17 11 Tata Elxsi Ltd. 24.90 29.13 24.45 26.19 ....
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.... disposed of by order dated 27.04.2022 according to which the total adjustment was reduced to Rs. 4,34,70,681/-. It is also submitted that, the adjustment proposed under trading segment became Nil. 7. The Ld.AR submitted that, thus before this Tribunal, the assessee is contesting the adjustment proposed under SWD segment. As reproduced here in above, only grounds contested by the assessee is in respect of Ground no. 2 in part, pertaining to SWD segment. Ground nos. 4.3 & 4.4 and additional ground raised in application dated 19.08.2022 being 1(a), 1(b) and additional ground no. 2 raised in application dated 17.02.2023. It is the submission of the Ld.AR that the remaining grounds becomes either general in nature or academic at this stage and may be left open to be contested in an appropriate circumstances. 7.1. Before we carry out the comparability analysis, it is sinequa non to understand the functions performed, assets owned and risks assumed by assessee. 7.2. Thus the assessee has been characterised to be a contract service provider to its AE with absolutely minimal risk undertaken in the rendering of services. 8. We note that Ground nos. 4.1-4.4 are to be disposed of along wi....
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..../2021 for A.Y. 2016-17 j) Optiva India Technologies Pvt. Ltd. in ITA No. 194/PUN/2021 for A.Y. 2016-17 k) M/s. Hewlett Packard (India) Software Operation Pvt. Ltd. in IT(TP)A No. 2866/Bang/2017 for A.Y. 2013-14 l) Arm Embedded Technologies Pvt. Ltd. in IT(TP)A No. 3374/Bang/2018 for A.Y. 2014-15 m) Red Hat India Pvt. Ltd. in ITA No. 1379/M/2021 for A.Y. 2016-17 8.3. On the contrary, the Ld.DR placed reliance on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 8.4 Admittedly, the assessee is a captive service provider to its AE. The FAR analysis of assessee establishes that it does not undertake any risk in terms of projects undertaken or services rendered. The functions carried out by the assessee are strictly on the basis of directions from its AE and the payment by the AE to the assessee is on cost+markup. The comparables sought by assessee herein for exclusion carry out diverse activities and has significant brand values. These companies are owning huge intangibles and also undertakes its own R&D which is not the case of the assessee before us. The decisions herein above relied by....
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....n of application of RPT filter, the assessee had made the following submission before the DRP:- 4. Fails the Related Party Transaction to Sales filter applied by the learned TPO In the show- cause notice issued, the learned TPO has excluded companies for which the ratio of RPT to sales exceeds 25% during the current year i.e., during FY 2014-15. The relevant extract from the show-cause notice is reproduced below for ease of reference: e) Companies who have more than 25% related parry transactions of the sales were excluded. Companies having related party transactions of more than 25% are proposed to be excluded. A threshold of 25% is being applied following the provisions of Section 92A(2)(a) which provides a limit of 26% of the equity capital carrying voting rights for treating an enterprise as Associated Enterprise. if the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. Therefore, on a balancing note, 25% is a proper threshold limit for related party transactions. ....
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.... following view:- "64. The next objection of the Assessee is that when the most appropriate method selected for determining ALP is the TNMM there is no reason as to why one should look at price difference in offshore software development and onsite software development. It is no doubt true that in TNMM it is only the margins in an uncontrolled transaction that is tested with reference to the controlled transaction but it is not possible to ignore the fact that pricing will have an effect on the margins obtained in a transaction. The argument that if pricing structure were to be considered as criteria, then it will have to be seen as to what is the pricing structure of all the comparable for various projects cannot be accepted because the TPO has not chosen any other onsite software service provider with a revenue composition of more than 75% from onsite software services as comparable. As rightly observed by the TPO, the pricing is different in onsite when compared to offshore operations. The further observations of the TPO that the reasons for the same lie in the fact that while in the case of OFFSHORE projects most of the costs are incurred in India; an ONSITE project has to b....
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.... appropriately applied by the TPO. 68. Admittedly the onsite revenue in the case of the following comparable companies identified by the Assessee was more than 75% of its export revenues viz., a) Visu International Ltd. b) Maars Software International Ltd. c) Akshay Software Technologies Ltd. d) VJIL Consulting Ltd. e) Synfosys Business Solutions Ltd. The above companies were therefore rightly not considered as comparable by the TPO. We hold accordingly." 36. It is seen that the TPO in coming to the conclusion that the onsite revenue filter is not applicable has placed reliance on the decision of the ITAT Mumbai Bench in the case of Capegemini as quoted in para 16 in para 14 of the TPO's order, but that decision does not deal with a case of onsite revenue filter and the decision was rendered on the facts of its own case. 37. On the issue of RPT filter, we notice that the TPO in para 16 has accepted that the RPT filter should be @ 25%. In the case of Persistent Systems Ltd., the RPT is at 31.32% as extracted in the earlier part of this order and therefore this company should be excluded by application of RPT filter. In view of the above, we do not wish to go into other ....
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....ed in development of software products in addition to software services. - Owns intellectual property rights. - Incurs significant research and development costs. - Carries out significant activities based on onsite business. - Owns products such as Finacle, Edge Verve and other product based solutions. Extra-ordinary event of merger with Infosys Consulting India Ltd. Segmental profit & loss account not available. Commands substantial brand value. 40. The DRP, however, has not thought it fit to exclude this company by observing that this company has substantial pre-dominant revenue from software services and the growth was not attributable to any brand value. Presence of onsite activity and the expenses on R&D have all been brushed aside. In our view, the difference pointed out by the ld. counsel for the assessee before us show that this company cannot be compared with that of the assessee basically because of its business model, presence of onsite revenue generation and other reasons cited before us. Besides, the reason that turnover of this company is huge and more than 10 times that of the assessee. 41. The next company sought to be excluded is Mindtree L....
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....assets owned and risks assumed by the assessee under the segment is similar with A.Ys. 2014-15 & 2015-16 (supra). Respectfully following the above view, we direct the Ld.AO to exclude Infosys Ltd., Persistent Systems Ltd., Mindtree Ltd. and L&T Infotech Ltd. from the final list." Respectfully following the above, we direct exclusion of Larsen & Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd. and Infosys Ltd. from the final list. 8.5 The decision of Coordinate Bench of this Tribunal in case of Subex Ltd. vs. DCIT (supra) for A.Y. 2017-18 by order dated 30.11.2022 has considered Nihilent Ltd. and OFS Technologies Ltd. "Nihilent Ltd. 10. The ld AR for the assessee submitted that this company Nihilent Ltd. is predominantly engaged in rendering of software services, business consulting in the area of enterprise transformation, change and performance management and providing related IT services. Nihilent in engaged in rendering diverse services. The Company intends to diversify and expand into various other areas such as analytics, big data, internet of things, etc. In this regard he referred page nos. 763 to 767 of the paperbook. 10.1 The assessee relied on the ....
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....such information in the annual report. The ld DRP also noted at page 73 of the annual report, the independent auditor has certified, 'the company does not have any purchase of inventories or sales of goods since it is a service company primarily rendering software services'. In view of these, the ld DRP held that this company is functionally comparable to the assessee and the pleas raised in this regard were rejected by him. As the company is primarily engaged in software development services and earns the revenue from this activity there is no need of providing segmental information as per AS 17. 11.1 The ld DR further stated that the assessee has argued before the ld DRP that the Company acquired G Net Group LLC in the US and Intellect Bizware Services Pvt Ltd, which are engaged and specialised in ERP and SAP. On careful perusal of the information in the annual report, the ld DRP noted that "during the year, Gnet Group LLC, USA ("Gnet") has merged with its holding Company - Nihilent Technologies Inc.. USA ("NTI"), with effect from 1 January 2017 vide the Article of Merger filed in the State of Minnesota. As this merger was between a holding company and its wholly owned....
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....this company Nihilent Ltd. is not functionally similar to assessee's case as held by the coordinate bench of the Tribunal in the case of M/s. SanDisk India Device Design Centre Pvt. Ltd. in IT(TP)A No.288/Bang/2021 dated 30.6.2022, wherein held as under: "17.9 In respect of Nihilent Ltd., Infobeans Technologies Ltd. and Aspire Systems (India) Pvt. Ltd., Hon'ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT (supra) observed as under: "Comparable Sought to be excluded by the assessee Aspire System India Pvt. Ltd. (Aspire) 40. The assessee sought exclusion of Aspire from the final set of comparables for benchmarking SDS segment on the ground that it fails Related Party Transaction (RPT) filters as its RPT/ sales ratio is more than 25%. The assessee computed the significant related party transactions at 37.58% whereas the Ld. TPO computed it at 23.55%. The TPO is directed to recalculate the RPT/sales ratio by providingof the Income-tax Act,1961 ['the Act' for short]of the Income-tax Act,1961 ['the Act' for short]of the Income- tax Act,1961 ['the Act' for short]of the Income-tax Act,1961 ['the Act' for short]of the Income-tax A....
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....comparables, we note that the segmental financials are not available in respect of Nihilent and Infobeans and the RPT in respect of Aspire Systems India Pvt. Ltd. is more than 25% being the threshold limit considered by the Ld.TPO. Nothing has been placed before us by the Ld.DR in order to take a different view. Respectfully following the Hon'ble Mumbai Tribunal, we direct the Ld.TPO to exclude Nihilent, Infobeans and Aspire Systems from the final set." 12.1 Keeping in view of the above order of the Tribunal, we direct the AO/TPO to exclude this company Nihilent Ltd. from the list of comparables. OFS Technologies Ltd. 13. The ld AR for the assessee submitted that this company OFS Technologies Ltd. is engaged in diversified activities. OFS is a software development and information technology outsourcing company, enriched its core expertise over the last financial year in Enterprise Application Development, Mobile Applications Development, Cloud Enablement, UI Development, DevOps Implementation and Data Analytics solutions. He submitted that OFS is engaged in outsourced product development which is different from software development activity carried out by the assessee. The....
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....e employment cost filter for the F.Y. 2014-15, the ld DRP directed the TPO to verify the plea of the assessee. If it fails the employment cost filter for the above year, the TPO was directed to consider the margin only for the F.Ys. 2015-16 and 2016-17. 14.2 The ld. DR further stated that the assessee argued before the ld DRP that the company fails export turnover filter for the F.Y. 2014-15 and hence if the company is considered as comparable the margins pertaining to F.Y. 2015-16 and F.Y. 2016-17 are only to be considered. On verification of the annual reports, it was seen that the company's export turnover is below the threshold limit of 75% adopted by the TPO. The TPO, was therefore directed by the ld DRP to verify and if the export turnover is below 75% for the F.Y. 2014-15 the margins pertaining to financial years 2015-16 and 2016- 17 should be considered for determining the ALP. 14.3 The ld DR stated that a plea was also raised before the ld DRP that this company has incurred substantial expenditure towards R&D and hence not to be taken as comparable. However, perusal of the information in the annual report shown that there is no separate expenditure item under the....
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.... therefore deserves to be excluded. We have perused the submissions advanced by both sides in the light of records placed before us. 9.3. We note that the authorities below has not verified the annual reports to come to a conclusion that the export revenue filter is not satisfied. In the interest of justice, we direct these comparables back to the Ld.AO/TPO to verify the FAR analysis of these comparables with that of assessee and to consider its inclusion in case it satisfies all the relevant filters. Accordingly, Additional Ground no. 1(b) stands partly allowed. 10. Additional Ground no. 2 raised in application dated 19.08.2022, the Ld.AR submitted that margins of Harbinger Systems Pvt. Ltd. and CG-Vak Software and Exports Limited has been wrongly computed. He thus seeks a direction for correction of the margins of the two comparables mentioned hereinabove. We direct the Ld.AO/TPO to recompute the margins of these comparables in accordance with law. Accordingly, additional ground no. 2 vide application dated 19.08.2022 stands allowed for statistical purposes. 11. Additional Ground no. 2 in application dated 17.02.2023 is in respect of considering bad debts and provi....
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....[2011] 142 TTJ 358/[2012] 16 ITR (Trib.) 73 (Hyd.), it was held that for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the AEs has to be considered and that bad debts/reimbursements have to be excluded. Thus the expenses excluded by the TPO were in the nature of non-operating expenses. Therefore, we do not find any infirmity in the approach of the TPO. Hence, the objection is not found acceptable. Accordingly, we do not find merit in the plea that the margin computation of M/s CG VAK, ICRA Techno Analytics Ltd, L&T Info tech, Persistent Systems & Tech Mahindra are erroneous." 7. Learned Counsel for the assessee brought to our notice the decision of the ITAT, Bengaluru Bench, in the case of Maxim India Integrated Circuit Design Pvt. Ltd., Vs. DCIT in IT(TP)A No.1573/Bang/2017 order dated 02.11.2020 wherein this Tribunal dealt with identical ground of appeal after considering the decision cited in the order of the learned DRP as follows: "13. The next contention of the assessee is that the TPO has not considered Provision for bad and doubtful debts as an operating expenditure. The Ld A.R submitted th....
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....liabilities and losses even though the amount cannot be determined with certainty and represents only the basic estimate in the light of available information. Para 6 of Accounting Standard-l defines accrual as the assumption that revenues and costs are accrued, i.e., recognized as they are earned or incurred and recorded in the financial statements of the period to which they relate. 52. Thus, going with the abovementioned facts and statutory provisions, when the making of provisions is very much in the interest of business to show the true and fair view and statutorily required, it cannot be said that such provisions are of non-operating nature. Such provisions are made to comply with the requirements of statute. 53. The learned TPO treated provision for doubtful debts as non-operating referring to the Safe Harbour Rules notified by CBDT, which are not applicable for the year under consideration as mentioned above. 54. Ld. CIT(DR) relied on the order of TPO. 55. As regards the treatment of provision of doubtful debts also, we find that the reasoning given by ld. TPO cannot be accepted because he has primarily relied on safe harbor rule for treating this as non-operati....
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.... of the assessee, then the said expenditure has to be taken so in the case of comparable companies also. 16. Accordingly, following the decision rendered by the co-ordinate bench in the case of Brocade Systems (P) Ltd (supra) and Rolls Royce India (P) Ltd (supra), we direct the AO/TPO to consider Provision for doubtful debts as an operating expense." 8. Learned Counsel brought to our notice the decision of the Tribunal rendered in the case of ACI Worldwide Solutions Pvt. Ltd., Vs. DCIT in IT(TP)A No.1893/Bang/2017 order dated 27.09.2019 wherein this Tribunal decided identical issue in favour of the assessee by following the decision of the Hon'ble Karnataka High Court in the case of Pr.CIT Vs. Business Process Outsourcing India Pvt. Ltd., (2018) taxcorp (DT) 73195 (HC Karnataka). The following were the relevant observations of the Tribunal: "8. As far as the exclusion of provision of bad and doubtful debts from the operating cost of the comparable companies is concerned, the learned Counsel for the assessee brought to our notice that while considering the international transaction in the distribution segment, the TPO has himself considered provision for bad and doubtful de....