TaxTMI 
TaxTMI 
2023 (11) TMI 1190
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....y to the Appellant to file a written submission in response to the Show-cause notice. Dispute Resolution Panel ('Ld. DRP') erred in upholding the same by contending that there was no denial of opportunity to the appellant. * Further, the Ld. DRP erred in not providing an opportunity to the appellant to provide its contentions on the second remand report issued by the Ld. TPO on 14 June 2022, thereby not complying with the provisions of Section 144(11) of the Act. * The Ld. DRP has failed to comply with the provisions of Section 144C(6)(C). The Ld. DRP has erred not considering the rejoinder to the remand report dated 15 March 2022 filed by the appellant on 25 March 2022 wherein the appellant has provided its detailed contentions on the comparability of certain companies rejected by the Ld. TPO in the first remand report dated 15 March 2022. Prayer * The Appellant prays that the order passed by the AU be considered non est in accordance with the provisions of Section 144(7) of the Act. * The appellant is aggrieved that the opportunity of being heard was not provided by the Ld. DRP with the reference to the remand report and the same is no....
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....s conducted by the Appellant in its TP Report ought to be accepted. Accordingly, the Ld. DRP/ TPO be directed to determine the arm's length price after separately testing the profitability of the branches operating in different regions and the Indian location of the appellant. Ground Reworking of segmental profitability Based on the facts and in the circumstances of the case, and in law, the Ld. DRP/ AU/ TPO has erred in reworking the segmental profit and loss account of the Appellant by ignoring the existing overhead absorption rate and adopting an incorrect/adhoc allocation key for G&A costs and depreciation. Prayer The Appellant prays that the segmental profitability as provided in the TP Report should be accepted. Appellant also prays that, if at all, the reworking made by TPO is upheld, the "average person month" should be accepted as an allocation key for absorption of G&A Costs in respect of software development services segment. The Appellant further prays that, if at all, the reworking made by Ld. TPO is upheld, the Ld. TPO be directed to ignore the adhoc/arbitrary allocation of depreciation expenses and adopt consistent allocat....
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....pellant prays that the functionally non-comparable companies namely E-infochips Private Limited, Cybage Software Private Limited, Nihilent Limited, Exilant Technologies Private Limited and Ninestar Information Technologies Limited selected by the AU based on the directions of Ld. DRP ought to be rejected. Corporate tax related grounds Ground o: Additional disallowance u/s 14A of the Act read with Rule 8D(2)(ii) of the Rules On the facts and in the circumstances of the case, and in law, the AU based on the directions of Ld. DRP has erred in invoking and applying the provisions of Rule 8D of the Rules and thereby proposing an additional disallowance of INR 4,50,70,798 under section 14A of the Act by directly applying formula given in Rule 8D(2)(ii) of the Rules (being 1% of the annual average of monthly value, the income from which do not form part of total income). Prayer The Appellant prays that the AU be directed to not invoke provisions of Rule 8D(2)(ii) of the Rules and not to consider the disallowances of INR 4,50,70,798 u/s 14A of the Act r.w rule 8D(2)(ii), and therefore additional disallowance of INR 4,50,70,798 under u/s 14A of t....
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....entered into following International Transactions with its Associated Enterprises (AE) : Sr. No. Description of the international transactions Amount (INR) Method used 1 Provision of software development services by Persistent Systems Ltd(PSL) or its branches 1,591,300,721 TNMM 2 Payment of licensing of distribution rights of software product 102,064,491 RPM 3 Payment for Support and Maintenance services in relation to sublicensing 56,793,750 RPM 4 Onsite software development services availed from AEs 1,719,812,996 TNMM 5 Commission received for Sales and Marketing Services 18,077,794 CUP 6 Commission paid for Sales and Marketing Services 604,009,635 TNMM 7 Offshore Software Development Revenue received by PSL from AE net of compensation for Sales & Marketing services by AE 3,033,905,444 TNMM 8 Recovery of cos of assets from AEs 2,733,134 Other method 9 Outsources software development services availed from AEs 8,867,115 Other method 10 Receipt of interest on loan granted for working capital 30,864,339 Other method 11 Reimbursement of expenses ....
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....nature of expenses and applying a reasonable allocation key accordingly. 3.4 In the present case, the common costs to be allocated to segments are in the nature of G&A staff cost (for HR/Finance/Admin departments), recurring cost of computers & laptops, communication costs, etc. By the very nature of these expenses, it is evident that such costs are common in nature and can at best, have a correlation or. may change depending upon on the number of people/resources utilised by the assessee. 3.5 For example, HR and finance teams cater to various needs of employees working for different segments of the Appellant. The HR team looks after the People function, the finance team processes payroll for the employees, the admin team plans and controls overall administration and functioning of offices. Communications expenses such as mobile or landline or internet expenses are again expenses incurred by a company for its employees and depend upon number of telephone users 3.6 Therefore, considering the nature of G&A/common costs, it is evident that the same are dependent or have a correlation to the number of employees in the company i.e. headcount of the company. Ac....
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....cost involved in performing certain services. Where there are direct costs are involved they are required to be directly attributed to the particular profitability statement of that segment however when indirect costs are involved it is necessary that appropriate allocation keys which are rational and quantifiable are adopted for allocating them to the particular business segment to derive its correct profitability. This exercise can be carried out by the authorities as well as the appellant to fulfill the object of determination of the arm's length pricing of an international transaction. As the allocation keys for allocating indirect cost earlier adopted by the appellant was 'headcount' and now also the appellant for most of the indirect expenditure has retained the same allocation key and out of indirect expenses some of the direct expenses have been identified and are allocated to a particular business segment, further when neither the remand report nor before us any infirmity was pointed out with respect to the allocation keys adopted by the appellant before CIT appeal, we see no infirmity in the order of Ld. CIT (A) in arriving at ALP of the international transact....
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....ts, etc. Allocation as per Direct cost ratio would result in allocating higher costs to segments where the salary cost of employees is higher and vice versa. Here, the Appellant wishes to submit that while the number of employees is a relevant factor for incurrence of common costs, the salary of such employees have no relevance to such common costs. For example, communication costs such as telephone or internet or administrative expenses such cost of water bottles, refreshments, etc. would depend on number of users, irrespective of their salary or designation. 4.4 An allocation key for allocation of common costs cannot be a combination of other costs which have no correlation with the common costs whatsoever. Such a method would not lead to determination of correct profitability. Thus, the Appellant submits that the allocation key applied by the TPO is without any basis and is arbitrary in nature. 4.5 Further, the Appellant would also like to point out that the TPO himself has admitted that in software companies, allocation of unallocated cost considering per person factor is normal and yet, the TPO proceeded to apply a ratio of Direct costs + All other costs on t....
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....reasonable to use headcount as a basis for allocation of all common costs. 4.8 Further, the Ld. DR also relied on an extract of the OECD Guidelines which dealt with the issue of allocation in the context of intra group services. The Appellant would like to submit here that the OECD guidelines in fact support the case of the Appellant that the allocation of expenses should be carried out by having regard to the nature of expenses and headcount/no. of employees/no. of users is an acceptable key for the said purposes. Also, the OECD guidelines nowhere recommend that Direct cost could be an acceptable allocation key for the purpose of allocating common costs. The Appellant would also like to humbly submit that to the best of our knowledge, none of the case laws on the said issue of allocation key approve or discuss allocation of common costs on the basis of Direct Cost ratio. 4.9. In light of the above, the Appellant humbly submits that headcount allocation key is a more appropriate and rational method to approximate/calculate the costs allocable to segments rather than the ratio of Direct costs + All other costs. 6. Conclusion In order to conclude a....
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....he Assessee used sales ratio b) When TPO showed disagreement with (a) above, the assessee revised its PLI computation by allocating such cost on man-hour basis c) However, in TP Order, the TPO disagreed with the method adopted by the assessee and PLI computation is made using Direct cost as the basis. 1.1 TPO's stand on allocation of cost: In the segmental accounts as prepared by the assessee in TPSR, the assessee has prepared segmental based on sales. Contention of the assessee is rejected on the basis that # para 7 of TPO order The assessee is having 3 different segments: Segment 1 POSS-Software Development Services The Revenue (receipt) is tainted (i.e.- controlled transaction). The receipts therefore are dependent on the cost incurred and receipts would be in proportion to agreed mark up between the AEs Segment 2 Distribution Segment The Cost is tainted (i.e.- controlled transaction). Segment 3 Non AE Segment The entire business is with non-AE Therefore, when the common cost is required to be allocated while deriving PLI for POSS, the basis for revenue is not appropriate, because the s....
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....n this context, there may be no need to use multiple allocation keys if the taxpayer can explain the reasons for concluding that a single key provides a reasonable reflection of the respective benefits. For reasons of consistency, the same allocation key or keys should be applied in determining the allocation to all recipients within the group of the same type of low value-adding intra-group services. (Source: Base Erosion and Profit Shifting (BEPS) - Comments Received on Public Discussion Draft - BEPS Action 8 - Implementation Guidance on Hard-to-Value Intangibles; 5th July 2017) 1.3 Assessee's reliance on various Judgements: During the hearing, before the Hon'ble bench, the DRs have distinguished the judgments as all the judgements, which are relied by the assessee are based on set of different facts/arbitrariness as pointed out by the Hon'ble ITATs 1.4.1 Further submission in this matter: 1.4.1 As already mentioned, in the TP order, the assessee's segmental turnover is as under: S. No Nature of Transaction Turnover % of total TO POSS 1,59,13,00,720 9.18 Distribution Segment 21,18,1....
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.... development category. Assessee therefore was asked a very specific query regarding selection of such comparable. A query raised by the TPO and the reply received by the assessee vide letter dated 07/07/2021 is reproduced below: FAR and comparable 2.1. Relevant extract from your good self's notice: 6. Regarding the work related to software development services, you have carried out benchmarking analysis using TNMM as MAM. Some of the comparable selected by you ore in product development category. This issue was under discussion in meeting dated 01/07/2021. Subsequently, in your letter dated 02/07/2021, you hove clarified that these computable companies, (though engaged in product development) are having brooder functional similarity with your company's FAR analysis. Similar discrepancy is also noticed in the case of comparable selected for benchmarking of transaction of your branch office. Please confirm that all the comparable of branch offices are also matching in FAR analysis. 2.2. Our response: 2.2.1. As detailed in the TP study report and our letter dated 02 July 2021. we confirm that PSL as well as its branches are eng....
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.... - Intense Technologies Ltd. - 19.34% 17.36% Mindtree Ltd. - 19.89% 21.10% Helios & Matheson information Technology Ltd. - - 19.36% R S Software (India) Ltd. - 28.85% 25,42% Akshay Software Technologies Ltd. - -- 3.29% 21. With such specific reply from the assessee (as mentioned above) with regard to selection of product companies in comparable set and looking to the record of the assessee for accepting such comparable as product company the in previous years, TPO concluded that the FAR of the assessee matches to the FAR of the product development companies. 22. Accordingly, TPO carried out search of the comparable on the basis of reply of the assessee and on the basis of search strategy as adopted by the assessee and mentioned in TPSR, TPO suggested additional comparable. In view of the specific submission made by the assessee on the SCN issued on the functional profile of the comparable, none of the comparable as selected by the assessee has been rejected, in spite of judicial pronouncements of various judicial authorities rejecting such comparable with captive service providers. 24. ....
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.... appeal here onwards. Ground No.5 : Allocation of Common Cost: 6. The assessee has benchmarked provision of software development services by using Transactional Net Marginal Method(TNMM). The value of the said transaction was Rs. 1,59,13,00,721/-. The profit level indicator (PLI) adopted by assessee was OP/OC. The TPO has accepted TNMM as the most appropriate method and OP/OC as the PLI. However, TPO has observed that while calculating Operating Cost(OC), the assessee has allocated common cost on the basis Sales Ratio (page 6 of the TPO para 7.5). However, in the Transfer pricing Study Report the assessee has given following comment for the allocation of common cost, "The Management has represented that the profitability is computed based on prudent basis of allocation(page 301 of the Paper book)" In the Transfer Pricing Study Report there is no specific discussion regarding basis of allocation of Common Cost. Transfer Pricing Study report should have contained all these details but it does not contain the details of basis of allocation of common cost. 6.1 The turnover of the three segments of the assessee as tabulated by TPO as under : S.No. Nature of Transaction ....
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....n India. They provide the various common services, like HR, Legal, Internal Audit, Corporate Planning, Corporate Finance etc., to various AEs situated outside India, from India. Common Cost also consist of recurring cost of computers, laptops, Communications Cost, Internet Cost, Mobile cost etc. The Ld.DR has pleaded that Direct cost percentage shall be the appropriate parameter for allocation of the Common Cost of G&A expenses. However, as seen from the letter of Mr.Praveen Joshi, Head-Corporate Planning, dated 18/10/2021, which is at page 673 of the paper book, it has been explained by the Head of Corporate Planning that even the Direct cost is worked based on the Allocated Person Months(APM).The exact words of the said letter are reproduced here as under : "Generally, the direct costs for the projects are based on APMs which are base for identification of the direct costs. Further, in respect of inter-company projects, these APMs are taken as the basis for charging indirect costs (such as General & admin costs) to the respective Associated Enterprises (AEs). " Based on a specific request from the corporate tax team of PSL, I have reviewed the internal records a....
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.... 8,291,756 412,252 11,388,625 90,725,266 110,817,900 4,791,224 1,487,740,871 B 2.3 Cost of Technical professions- Others 1,960,871,669 1,960,871,669 B 2.4 Provision for doubtful debts -146,424,759 -146,424,759 B 2.5 Bad debts 157,622,688 157,622,688 B 2.6 Depreciation and Amortisation - originally absorbed 0 0 0 0 0 0 0 0 B 2.6A Depreciation and Amortisation - reworked 537,805,260 2,781,271 138,280 3,820,041 30,431,612 37,171,204 1,607,101 499,026,955 B.2 Sub total Indirect expenditure 5,185,975,966 11,073,027 550,532 15,208,666 121,156,878 147,989,103 12,437,115 5,052,549,778 B = B1 + B2 Total Expenditure 13,973,517,986 286,543,267 16,160,831 426,743,082 724,939,641 1,454,386,820 171,295,356 12,347,835,810 c Operating Profit(A-B) 3,353,971,736 45,014,470 1,003,541 48,290,429 42,605,459 136,913,900 40,515,....
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....r of employees of the Branches who availed these services. Also, the actual number of employees in the Branches are required to understand the utilisation of Communication Cost. We have already made it clear that all these details have nowhere been placed on records on behalf of the assessee. We have already mentioned that the Assessee has not categorically mentioned the basis of Common Cost Allocation in the Transfer Pricing Study Report, to that extent the Transfer Pricing report is unclear. 7.3 Therefore, in these facts and circumstances of the case, we agree with the TPO's calculation of allocation based on the direct cost as it is the best suitable basis for allocation of Common Cost of G&A. Because the direct cost is easily available and verifiable. The onus is always on the assessee to file all necessary details before the TPO to prove the allocation. In this case the assessee failed to file all the essential details even before us. Therefore, the allocation made by the TPO is sustained. Accordingly, the Ground Number 5 of the assessee is dismissed. The case laws relied by the assessee are factually distinguishable. 7.4 Accordingly, the Ground Number 5 of the Assessee ....
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..... As it has been held in various judicial rulings, there cannot be a cherry picking approach for selecting comparable by the TPO as well as assessee. Assessee should have subjected all the comparable selected by revenue to the same test. In the process of any analysis objectivity and consistency was to be maintained. Once the diversify business and the product development category are accepted by the assessee in reply to SCN and evident from the selection of comparable in last 3 years, the objections of the assessee on such issues are rejected." Unquote. 10.1 Thus, while rejecting the objections of the assessee, the TPO has not discussed Functional Comparability of these Additional Comparables individually. The TPO has also not discussed the case laws relied by assessee. 11. The assessee had also made elaborate submissions before the Dispute Resolution Panel(DRP) on this issue. 12. We will discuss each comparable here onwards. Exilant Technologies Pvt. Ltd. : 12.1 Assessee had submitted before the DRP and TPO that Exilant Technologies Pvt. Ltd., is functionally not comparable as it is also in the business of "Sale of Products". The assessee had also submitted that du....
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....f the products and development of product architecture and it provides technical inputs to the AE also in this regard. Hence the claim of the assessee that product -development is a high end activity that cannot be compared to the functions of the assessee in respect of POSS is not correct .Hence , the company E-Infochips (P) Ltd. is found functionally comparable to the assessee under TNMM method and hence we reject the contentions raised by the assessee in this regard." 13.1 We have perused the Annual Report filed by the assessee of E-Infochips Pvt. Ltd. It is observed that there is sale of products. It is also observed that it is in the business of Software Development and ITES. However, no segmental profitability is separately available in the Annual Report. We are searching comparable for the Software Development Activity of the assessee. However, in the case E-Infochips Pvt. Ltd., there is Revenue from Sale of Products. It is also having the activity of ITES as mentioned in note 42 of the Annual Report which is at page 5441 of the Paper Book filed by the assessee. However, the assessee is not into any trading activity. Therefore, assessee's segment of software development c....
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.... market basked analysis among others, data visualization and dashboards, and data enrichment and insight offerings including sentiment analysis, data abstraction, deep learning & artificial intelligence. Technology : Our technology-driven service offerings help businesses achieve greater agility in the digital era and enable systems to be future-ready, using a holistic design-thinking approach. Some of our most important technology offerings include produce development, user experience testing, technology re-engineering, cloud-based services, blockchain, Internet of Things SAP S4 HANA implementation & consulting, among others." 14.3 Thus, it is seen from the description of the services provided in the Annual Report that these services are functionally dis-similar to the services provided by assessee, hence, it is not functionally comparable. Hence, the TPO is directed to delete it. Cybage Software Pvt. Ltd. : 15. The DRP has upheld the selection of Cybage Software (P) Ltd., as comparable in para 7.2(b) as under: "As regards judicial decision cited by the assessee, we have already pointed out in paragraphs above that the decisions have been rendered in the....
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....mparable in para 7.2(e) as under: "We find that in the notes forming part of the financial statements of the company, under the heading 'Corporate Information', it has been stated that, Ninestar Information Technologies Ltd. is the world's leading digital transformation solution company and the number one offshore global media media monitoring solutions provider. Thus, from the Annual Report of Ninestars, it is clear that the company is engaged in provision of software development services. Even if the company is catering to customers in publication, communication and other industries to which the assessee is not catering to, it does not affect its comparability. What is to be seen is whether the assessee and the companies selected as comparables are providing services which fall under the same category (software development services, in the present case), and it is not material whether the companies selected are catering to the same industry/segment(s) as the assessee. Since the company is found to be engaged in provision of software development services, the contentions of the assessee regarding functional non-comparability are rejected. Also the assessee is also engaged....
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....d Scheme and Tax Free Bond. The assessee further submitted in Note that "the investments in mutual funds under 'Growth Scheme' should not be considered while applying formula prescribed under Rule 8D(2)(iii) of the Rules to calculate the disallowance u/s 14A of the Act as the returns from these investments under 'Growth Scheme' are not received in the form of dividend income,". The assessee in its working of computation has disallowed of Rs. 48,228,350/- as per Rule 8D. The working of disallowance for administrative cost incurred in making and maintaining these investments income from which is an exempt income as given by the Assessee Company in Annexure 13(b) of its submission has been found to be fair. Therefore, an amount of Rs. 48,228,350/- less Rs. 3157552/- which has already been debited towards expenditure to earn exempt income i.e Rs. 4,50,70,798/- is disallowed u/s. 14A of the Act and added back to the total income of the assessee." 17.1 Thus, it can be seen that the AO has not specified the subrule of Rule 8D under which the disallowance has been made. 17.2 The ld.AR relied on the order of ITAT Pune in assessee's own case in ITA No.1232/PUN/2017. The ITAT h....
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.... Ground No.10 : 18. The assessee had made additional claim of deduction under section 90 of the Act by filing a letter before the Assessing Officer which was not claimed in the Return of Income. The Assessing Officer rejected the said claim as it was not claimed in the Return of Income. 18.1 It has been submitted by assessee as under : "At the outset, the assessee would like to submit that while furnishing the return of income for AY 2018-19, the Assessee claimed relief under section 90 of the Act for an amount of INR 3,99,87,795 based on the TDS certificates received from overseas parties till the date of filing of Return of Income. Subsequently, the Assessee paid additional taxes of INR 48,97,620 on the income outside India (refer Annexure # 8a and 8b of the submission dated November 23, 2020) for which it received additional certificates in support of the same, however no claim was made by the Assessee in its return of income filed for the year under assessment. As the income corresponding to this additional income taxes paid overseas has already been offered to tax by the Assessee in the year under assessment, the Assessee prays Hon'ble Panel....