TaxTMI 
TaxTMI 
2023 (11) TMI 278
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....or application. For the year under consideration, the assessee filed its return of income on 30/11/2017, declaring gross total income of Rs. 203,94,21,362. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. Pursuant to the reference by the Assessing Officer ("AO") under section 92CA(1) of the Act, the Transfer Pricing Officer ("TPO") proposed a total transfer pricing adjustment of Rs. 12,42,61,908 vide order dated 19/01/2021, passed under section 92CA(3) of the Act. In conformity, the AO passed the draft assessment order dated 28/03/2021, under section 143(3) r/w section 144C(1) of the Act after making various additions/disallowances. While deciding assessee's objections against the addition/disallowances made by the TPO/AO, the learned DRP vide its directions dated 27/12/2021, granted partial relief to the assessee. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment on 29/01/2022 under section 143(3) r/w section 144C(13) of the Act. Being aggrieved, the assessee has raised the following grounds:- ....
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....ot following a structured search process and thus resorting to cherry picking of comparable companies: d) Selection of companies which are functionally not comparable and rejection of functionally comparable companies selected by the Assessee; e) Inconsistency in use of updated margins of comparable companies. The Appellant prays that the aforesaid adjustment be deleted. 5. Ground no. 5 - TP Adjustment on account of provision of engineering and related services (Engineering) segment - INR 6,79,69,676 On the facts and in the circumstances of the case and in law, the Learned AO/TPO erred in making an adjustment for provision of engineering and related services by: a) Disregarding the TP Study maintained by the Appellant in good faith and with due diligence; and b) Disregarding the aggregation approach adopted by the Appellant by segregating the three divisions of the Appellant within the engineering and related services segment and thereafter applying the same benchmarking analysis to such segregated three divisions. The Appellant therefore submits and prays that the aforesaid adjustment be deleted. 6. G....
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....unds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing." 3. Ground no.1, raised in assessee's appeal is general in nature and therefore, needs no separate adjudication. 4. The issue arising in ground no.2, raised in assessee's appeal, is pertaining to overstating the total income of the assessee in the computation sheet forming part of the final assessment order. 5. During the hearing, the learned Authorised Representative ("learned AR") submitted that the AO computed the total taxable income on page 17 of the final assessment at Rs. 218,46,93,421, however, while computing the total demand payable in the computation sheet annexed along with the final assessment order, the AO has considered the total income of Rs. 218,87,79,755. We find that pursuant to the DRP's direction the total transfer pricing adjustment was reduced to Rs. 12,01,75,576 from the original adjustment of Rs. 12,42,61,908, accordingly the total taxable income as proposed by the AO vide draft assessment order of Rs 218,87,79,753, was reduced to Rs. 218,46,93,421, vide final assessment order. Since while computing the to....
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....ional Net Margin Method ("TNMM") as the most appropriate method with the Profit Level Indicator ("PLI") of Operating Profit to Total Cost ("OP/TC"). By considering itself as the tested party, the assessee identified 10 comparable companies which had a working capital adjusted range of weighted average OP/TC of 6.16% to 15.15%, with a median of 10.03%. As the assessee computed its own PLI at 13.87%, accordingly, it claimed that the international transaction of "Provision of IT support and related services" is at arm's length price ("ALP"). 9. During the transfer pricing assessment proceedings, the TPO objected to the selection of filter of turnover less than Rs. 1 crore and introduced three new filters, i.e. (i) turnover filter of minimum 1/10th and maximum 10 times the turnover of tested party, (ii) export filter of more than 75%, (iii) availability of segmental account. By applying the aforesaid 3 additional filters, the TPO rejected three comparable companies selected by the assessee finding them same to be not satisfying the turnover filter. The TPO also introduced five new comparable companies, i.e. Comviva Technologies Ltd, XS Cad India Private Limited, Nihilent Ltd, Infobe....
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....omparable to the assessee and satisfies all the filters. Before the learned DRP, the assessee submitted that this company is into diversified activities and no segmental data is available. The assessee further submitted that this company is involved in software publishing, consultancy, and supply and engaged in the writing of software of any kind following the directive of the users; software maintenance, and web page design. The DRP vide its directions rejected the objections filed by the assessee on the basis that the data of the company shows that it is engaged in ITeS. Being aggrieved, the assessee has challenged the inclusion of this company as comparable. 13. During the hearing, the learned AR submitted that this company is functionally dissimilar as it is involved in software development services and the sale of licences. The learned AR further submitted that the relevant segmental data of this company is not available. On the other hand, the learned Departmental Representative ("learned DR") vehemently relied upon the order passed by the lower authorities. 14. We have considered the submissions of both sides and perused the material available on record. From the perus....
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....e to compare the same with the assessee. On the contrary, the learned DR vehemently relied upon the order passed by the lower authorities. 17. We have considered the submissions of both sides and perused the material available on record. From the perusal of the annual report of XS Cad India Private Limited for the financial year 2016-17, forming part of the paper book from pages 892-910, we find that this company earned income from the export and import of computer-aided design, training & coaching, manpower recruitment, web design, and development, during the year under consideration. From the segmental reporting in Note 23(v) to the financial statement of this company, we find that the segmental reporting of the company is based on the geographical location of the customer and accordingly country-wise, namely for USA, Canada, Australia, UK, Germany, and India reporting has been made by this company. Further, the company treats its complete operations as a single segment, i.e. "Information Technology Services". As noted above, the assessee has made relevant segment reporting in the notes to its financial statements. Since this company is earning revenue from various streams, th....
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....onsulting and IT service solutions integration company. We further find that 100% of the total turnover of the company is from IT consulting, software development, and related services. However, there is neither any bifurcation of revenue nor the availability of relevant segmental data. Further, we also find that the activities relating to exports are limited to software development and consultancy. Since, as noted above, the services rendered by the assessee under the ITeS segment are primarily in the nature of database administration and management, operating systems, and network administration, therefore, Nihilent Ltd cannot be said to be functionally comparable to the assessee. Accordingly, we direct the TPO/AO to exclude Nihilent Ltd while benchmarking the international transaction pertaining to "Provision of IT support and related services". (iv) Infobeans Technologies Ltd. 21. The next comparable challenged by the assessee is Infobeans Technologies Ltd. This company was included as comparable by the TPO vide order passed under section 92CA(3) of the Act on the basis that it is functionally comparable to the assessee and satisfies all the filters. Before the learned DRP....
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....e functionally comparable to the assessee. Accordingly, we direct the TPO/AO to exclude Infobeans Technologies Ltd while benchmarking the international transaction pertaining to "Provision of IT support and related services". (v) Cygnet Infotech Pvt. Ltd. 24. The next comparable challenged by the assessee is Cygnet Infotech Pvt. Ltd. This company was included as comparable by the TPO vide order passed under section 92CA(3) of the Act on the basis that it is functionally comparable to the assessee and satisfies all the filters. Before the learned DRP, the assessee submitted that the company has not provided segmental information by bifurcating revenue generated from IT support and related services vis-à- vis revenue generated from other activities. It was submitted that this company's functional profile is different from the assessee and the services are not comparable to that of the assessee. The learned DRP rejected the objections filed by the assessee and held that this company is functionally comparable to the assessee and satisfies all the filters. Being aggrieved, the assessee has challenged the inclusion of this company as comparable. 25. During the hearing, t....
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....ssee functions as a communication channel between the associated enterprises and the customers in India. The associated enterprises support the assessee by providing an overview and understanding of the products dealt with so as to enable the assessee to promote these products in the Indian market. Once the customers are identified, the associated enterprises negotiate and conclude the price and other terms and conditions of the contract directly with the customers. The assessee is not involved in the acquisition process. The associated enterprises subsequently supplied products to the customers based on their requirements. For benchmarking this transaction, the assessee used TNMM as the most appropriate method with PLI of OP/TC. By considering itself as the tested party, the assessee identified five comparable companies with an average margin of 10.49%. As the assessee computed its own PLI at 10.98% accordingly, it claimed that the international transaction of "Provision of Facilitation Support Services" is at ALP. 30. The TPO vide order passed under section 92CA(3) of the Act rejected the two companies selected by the assessee as comparables, namely I Media Corp Ltd and MCI Ma....
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....clusion of this company as comparable. 34. We have considered the submissions of both sides and perused the material available on record. It is undisputed that under the "Facilitation Support Services" segment the assessee is engaged in providing marketing support services in India in relation to the products of the associated enterprises. Under this segment, the assessee promotes the products of the associated enterprises in the Indian market, and once the customers are identified the associated enterprises negotiate and conclude the price and other terms and conditions of the contract directly with the customers. Thus, the assessee functions as the communication channel between the associated enterprises and customers in India. From the perusal of the annual report of Axience Consulting Private Ltd for the financial year 2016-17, forming part of the paper book from pages 1424-1451, we find that this company has earned 100% of its total turnover from market research and public opinion polling. Further, this company has declared total revenue from operations from the sale of services. The assessee in the submission filed before the TPO has placed reliance upon the website extrac....
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....d as a comparable to the assessee in the assessment year 2014-15 and there is no change in the business activities of this company in this year. The learned DRP, vide its directions, rejected the objections filed by the assessee and held that the activities conducted by this company, i.e. event management activity, cannot be said to be similar in any manner to the facilitation services rendered by the assessee. Being aggrieved, the assessee has challenged the exclusion of this company as comparable. 36. During the hearing, the learned AR submitted that this company was accepted as a comparable in assessee's own case for the earlier year, i.e. assessment year 2014-15, by the TPO and the learned DRP. It was further submitted that there is no change in the functional profile of this company. On the contrary, the learned DR vehemently relied upon the order passed by the lower authorities. 37. We have considered the submissions of both sides and perused the material available on record. From the perusal of the annual report of MCI Management India Private Ltd. for the financial year 2016-17, forming part of the paper book from pages 1319-1331, we find that this company has claimed....
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....orders from the customers, the engineering and related services are outsourced by the associated enterprises to the assessee. In the transfer pricing study report, the ALP of the international transaction pertaining to the "Provision of Engineering and related services" was determined by aggregating and applying TNMM as the Most Appropriate Method upon considering OP/TC as the PLI and treating the assessee as the tested party. The assessee selected five companies as comparable for benchmarking this transaction with an average PLI of 10.93%. Since assessee's OP/TC margin was 23.13%, the international transaction pertaining to "Provision of Engineering and related services" was claimed to be at arm's length. During the transfer pricing assessment proceedings, the assessee was asked to show cause as to why the transactions of "Provision of Engineering and related services" be benchmarked separately for FCEC, EEC, and EIC divisions. In response thereto, the assessee submitted that functions performed by FCEC, EEC, and EIC divisions are the same, personal cost incurred as a percentage of total operating cost is almost the same across all three divisions, and the quantum of administrativ....
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.... of the Id. AR was that in the case of the assessee, the segmental data of each of the divisions i.e., EIC, EEEC, and FCEC were available, whereas the very same data is not available with the comparable companies. Hence, the assessee was justified in adopting aggregated or bundled approach in respect of aforesaid three divisions in its engineering and related services segment. The Id. AR also argued that the assessee had followed a similar approach of determining ALP of international transactions pertaining to engineering and related services segment on an aggregated basis from A.Yrs. 2006-07 to 2012-13 and the same has been accepted by the Id. TPO in earlier years after due examination of the international transactions of the assessee. It was pleaded that there is no change in the functions performed, assets employed and the risks assumed by the assessee in A.Y.2014-15 i.e. the year under appeal vis-à-vis the previous assessment years. Hence, it was pleaded that the Id. TPO was not justified in taking the divergent view during the year under appeal alone. 6.2. It was pleaded that the Id. TPO had taken conflicting views, as on one hand, he alleged that the services ....
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....hen shre the designs with customers for approval. * Post customer approval, the AEs develops the product and conducts acceptance tests at the customer location * The division provides assistance to the AEs in relation to financial analysis and buy out assistance. These services are not undertaken on standalone basis and are ancillary to the engineering design services rendered by the division. * Customer approaches the AEs for supply of certain products. The engineering services in e relation to the products are goutsourced to the division. * Based on specification received from the AEs, designs are developed for the product and shared with the AEs for their inputs and approvals. * The division carries out modifications if any based on inputs provided by the AEs. * Post AEs approval, a prototype for testing purposes is developed. Third party vendors identified by the AEs are engaged to manufacture the prototype and the prototypes are tested by the division. * The designs and test reports are shared with the AES. * AES share the with for designs customers approvals. * Post customer approvals, the AES manufactures and supplies ....
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.... services to its AE thereon. Hence, the Indian company i.e., assessee assumes lesser risks in all the three divisions. Hence, we hold that the Id. DRP had proceeded on an incorrect assumption of fact that assessee in EIC division is engaged in manufacturing activity. From the table reproduced above, it is very clear that assessee in EIC division subsequent to AES approval, develops proto type for testing purposes. The assessee does not manufacture the proto type. The third party divisions identified by the AES are engaged to manufacture the proto type and the proto types are tested by the assessee in its EIC division falling under engineering and related services segment. Later these designs and test reports are shared with the AES and the AE in turn shares the same with the customers for approvals. Post customer approvals, the AEs manufacture and supply the products to the ultimate customers. Hence, the observation made by the Id. DRP that assessee in EIC division is engaged in manufacturing activity is incorrect and not emanating from the facts available on record. In any case, we find that even if the observation of the Id. DRP that EIC division is completely different from ECEC....
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....tely by assuming that the functions, assets and risks undertaken by each of the STPI units were distinct from each other. The Delhi Tribunal, observed that the TPO totally disregarded the unity of business, administrative control, and unity of funds for the three units. The Tribunal also stated that independent FAR analysis of each unit with existing comparables is practically not possible due to the common management and interlacing of funds." 6.8. We also find that when the transactions are closely linked to each other, as in the case of the assessee before us, under the engineering and related services segment, it would be relevant in this regard to go into provisions of Indian transfer pricing regulations and other regulations as under:- Indian TP regulations Rule 10A of the Income Tax Rules, 1962 ('the Rules') defines transactions as - "includes number of closely linked transaction" 17. Other guidelines and regulations Further, we referred to other guidelines and regulations for guidance on aggregation of the international transactions and the relevant paras are reproduced below for your reference. a) Organisation f....
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.... are to be looked into which are as under:- Rule 10C (2) of the Rules reads as follows: "(2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:- (a) the nature and class of the international transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; Rule 10D of the Rules inter-alia states as follows: "10D (i) Every person who has entered into an international transaction shall keep and maintain the following information and documents, namely: (a).... (b).... (i) a description of the methods considered for determining the arm's length price in relation to each international transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case;" Section 92C of the Act reads as follows: "92C. (1) The arm's length price in relation to an international tr....
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.... it was observed that the assessee has its investments in equities where returns from investments are in the nature of dividends, which is an exempt income. The AO vide draft assessment order dated 28/03/2021, observed that though the assessee has not earned any exempt income from such dividends, it remains a fact that such investments are long-term investments and the basic purpose of equity investments is to increase the stake in companies and therefore being claimant of the profits of the said companies by way of dividends. It was further observed that equity investments made by the assessee being long-term investments, they do not necessarily result into dividend every year. Accordingly, the AO computed the disallowance of Rs. 75,18,750, under section 14A read with Rule 8D. The learned DRP vide its directions rejected the objections filed by the assessee. In conformity with the learned DRP's directions, the AO passed the impugned final assessment order. Being aggrieved, the assessee is in appeal before us. 45. We have considered the submissions of both sides and perused the material available on record. From the perusal of the financial statement of the assessee for the fina....