TaxTMI 
TaxTMI 
TaxTMI 
2023 (11) TMI 1190
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....se 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 not in accordance with the provisions of Section 1440(11) and Section 144C(6)(C) of the Act. ....
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....f 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 allocation key for depreciation expenses after ignoring Depreciation expenses originally absorbed by the appellant in its Segmental P&L as per TP Report. Ground 6: Non-acceptance/exclusion of overseas comparable companies On the....
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....te 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 the Act r.w rule 8D(2)(ii) be deleted. Ground 10: Additional relief under section 90 On the facts and circumstances of the case, and in law, the AU based on the directions of Ld. DRP erred in disregarding Appellant's claim for additional relief under section of 90 of the Act of INR 48,97,620 over and above the relief under section 90 claimed by t....
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....d 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 51,748,895 Other method 12 Recovery of expenses 82,205,774 Other method 13 Receipt of insurance claim on behalf of AE 157,355,828 Other method 14 Receipt of guarantee commission 1,846,769 Other method 15 Change back of ESOP cost 2,600,510 Other method 746,44,46,387 2.2 The organisation chart of the Persistent System Limited and its AEs is as under: Submission of ld.AR : 3. At the outset, the Ld. Authorised Representative(ld.AR) submitted that t....
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....ees 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. Accordingly, person months (headcount) should be considered as the morerational and appropriate allocation key for allocating the costs while computing segmental P&L. 3.7 Further, the Appellant would like to submit that the Appellant is engaged in provision of software development or support services. In the Service industry such as the Appellant's, the resources involved or deployed on the project is the most essential element as the billing for the time and material projects typically happens on the basis of the relevant person months. Therefore, allocation of common costs by facto....
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.... 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 transaction of the appellant...." (emphasis supplied) 3.9 In addition to the above, the Appellant would also like to place reliance on the following decisions rendered by the Hon'ble High Courts/Tribunals wherein the allocation key of 'headcount' has been accepted as a rational and appropriate key for the purpose of allocation of G&A/common/unallocable costs: a) EHPT India P. Ltd. - [2013] 350 ITR 41 (Delhi High Court) b) Fujitsu India Pvt Ltd. - ITA No. 604/2017 (Delhi High Court)[rendered in the context of transfer pricing adjustments in the services segment] c) Cisco Systems (India) P. Ltd. - ITA No. 140/20....
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....ommon 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 the basis that economic factors are different for different locations of the Appellant and hence per person factor is not appropriate. Here, the Appellant wishes to submit that the TPO has failed to understand and appreciate that while the direct costs are usually incurred at the respective branches, whereas the common costs are mainly incurred at PSL India. Accordingly, the economic factors affecting the direct costs may not really be relevant for incurrence of common costs. As explained above, the headcount factor would affect the incurrence of common costs more and the direct and other costs, having no relation with common costs would not be an appropriate factor for allocating the common costs. 4.....
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....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 and summarise the above submissions, the Appellant would like to state as under: a) The issue under dispute in ground no. 5 of the captioned appeal pertains to deciding the most appropriate allocation key for the purpose of allocating G&A costs to arrive at the segmental profitability of the POSS segment b) The allocation keys for the said purpose as discussed by the TPO/DRP/L. DR/ Appellant/ case laws are either on the basis of Revenue, Direct costs or Person months (Headcount). c) The allocation key of Revenue is not appropriate since the Revenue side is tainted in the case of POSS segment, as agreed by the TPO as well as the Ld. DR. d) The allocation key of Direct cost applied by the TPO is also not appropriate as direct costs such a....
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.... 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 same is tainted and the allocation on the basis of revenue in the POSS segment would result in allocation as per the agreed mark up on the cost. Therefore, TPO has proceeded with the allocation of expenses on the basis of direct cost and not on the basis of sales as done by the assessee in TPSR. As regards allocation in distribution, the revenue in distribution segment is 1.2% of total revenue and therefore will not have any significant impact on PLI. Further, the TPO has not made any adjustment in that segment. 1.2 OECD on cost allocation : D.2.3. Allocation of low value-adding service costs 7.59. The third step in this simplified charge method for low value-adding intra-group service costs is to allocate among members of the group the costs in the cost pool that benefit multiple members of the group. The taxpayer will select one or more allocation keys to apply for this purpose based o....
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...., 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 21,18,10,988 1.22 her sales 15,52,43,78,013 89.59 17,32,74,89,721 Above table shows, only 9.18% of turnover of the assessee is from software segment, as against 90.19% turnover of the assessee in rest of the business (with non AE and distribution). As such the Manpower of the assessee has been distributed unequally in the business and almost 90% of manhour are working for Non AE Segment. Thus, allocation of cost on man hour basis would distort the profit. It would result higher cost to nonAE business (notionally lowering its profit/PLI in this segment) and lower cost to AE business (Notionally increasing its Profit/PLI in this segment) As the Direct cost of the assessee are true indicators of allocation of cost, irrespective of the nature of business with AE and Non AE, the allocation as made by the TPO is correct. Further, in computation of PLl, as assessee's cost is untainted, and PLl is derived on OP/OC basis, allocation of cost on direc....
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....m that PSL as well as its branches are engaged in provision of software development and related services. The comparable companies are also engaged in the similar functional profile of provision of services. 2.2.2. Your goodselfis referring to companies involved in provision of product development services category. Here we would like to submit that the comparable selection for branches is also aligned with Functional Profile of the said branches of PSL i.e. provision of information technology services. Your good self will appreciate that the terms software development services or product development services or application development services etc. are typically interchangeably used in the IT industry. Here, we would like to state that the companies engaged in the provision of product development services should be compared with the assessee. Thus, we believe there is no discrepancy in the comparable selection. However, should your good self have any specific contention against any of the comparable company then we would be happy to address the same. 18. Thus, assessee even though some comparable are in product category, the assessee has admitted that the product companies com....
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....) Evoke Technologies Pvt. Ltd. 4.22 2(*) Sasken Technologies Ltd.(Software Services) 6.52 3 Harbinger Systems Pvt. Ltd. 7.91 4(*) CG-VAK Software & Exports Ltd. 8.19 5(*) E-Zest Solutions Ltd. 13.73 6 Exilant Technologies Pvt. Ltd. 15.09 7 Apttus Software Pvt. Ltd. 17.03 8 Ninestars Information Technologies Ltd. 17.17 9 Sagarsoft (India) Ltd. 18.28 10 Gwynniebee India Pvt. Ltd. 19.81 11 Nihilent Ltd. 21.14 12 Cygnet Infotech Pvt. Ltd. 24 13 (*) R Systems International Ltd 24.17 14 (*) Info beans Technologies Ltd. 26.37 15(*) BhilwardInfotechnology Ltd. (Software & IT related) 26.45 16(*) Tata Elxsi 27.19 17 E-InfochipsPvt. Ltd. 56.48 18 Cybage Software Pvt. Ltd. 57.12 35th percentile 17.03 Median 19.04 65th percentile 24 (*)selection of the assessee. In view of the same, product related comparable were selected by the TPO while determining PLI. As the assessee himself has stated in reply to query that product development comparables are in synchronization with the FAR of the assessee, the submission of the assessee to exclude the product development compan....
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....th AE. The TPO observed that assessee's allocation of common cost on the basis of sales is not proper, because in two segments the transactions are with AE; meaning thereby these are tainted segments. The Assessee has charged its AE at Cost Plus model. We agree with the TPO's observation that Sales cannot be taken as the basis for allocation of Common Cost as it is tainted. The TPO has allocated common cost based on direct cost. The DRP has upheld TPO's this view.During the Transfer Pricing Proceedings, the assessee submitted without prejudice that common cost may be allocated based on per person working. The assessee had submitted said working before the TPO. The TPO rejected assessee's said contention. The TPO stated that Direct Cost per person shows variations in different geographies, for example in Australia it was 6,50,429/-, whereas in India it was 1,14,315/- per person. Therefore, TPO was of the opinion that Direct Cost varies per person depending on the geographical location of the Branch/AE. The TPO stated that same thing applies to the formulae of per person allocation of common cost. TPO was of the opinion that common cost cannot be allotted based on the formula per per....
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....m various locations are given below: Location India Canada (Branch) UK (Branch) South Africa (Branch) Australia (Branch) Japan (Branch) Total. APMs 5282 663 477 5 12 12 6451 The aforementioned details are backed by robust records maintained by the Company based on internal systems and processes." 6.3 Therefore, even the Direct Cost, which is relied by the TPO for Common Cost allocation is ultimately based on the Manhour spent. Thus, the direct cost itself has a nexus with APM. 7. The working submitted by the Assessee before the TPO which is at the page no.627 of the paper book is as under : Annexure 12 - SEGMENTAL FINANCIAL ACCOUNTS OF PSL ON A WITHOUT PREJUDICE BASIS Sr.No Particulars Total Rs. Segment I-Provision of outsourced software services Segment IIDistribution of software products Segment III UK and South Africa branches Australia and Japan branches Canada Branch India Subtotal Subtotal Other States A Revenue from Operations 17,327,489,722 331,557,737 17,164,372 476,033,511 767,545,100 1,591,300,720 211,810,988 16,524,378,013 B Expenses  ....
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....3352 as per the letter of the Head-Corporate Planning, out of that 483 (477+5) person Month have been spend on UK and South Africa Branch by the Technical resources deployed on various projects executed for the AE under provision of software services segment called POSS. Therefore, the assessee worked out the formula as under 483/93342 = 0.52%. The assessee allocated Common Cost to its AE UK and South Africa 0.52% of the total common cost of G&A expenses. Thus, actually the assessee had applied Technical ManpowerRatio for allocation of G & A expenses. G&A expenses are general in nature like Legal, Audit, HR, Corporate Planning, Finance, Communications cost, Cost of Laptop computers used, etc. Therefore, the application of Technical Manpower ratio by the assessee in its working submitted to TPO is, conceptually wrong and the formula applied by the assessee may not be able to arrive at an appropriate profit level indicator. Therefore, for all the reasons discussed, the working submitted by the assessee is rejected. These services have been provided by 415 employees of the assessee from India. However, nowhere the Assessee has submitted Actual Number of Employees working in various br....
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....ity Level PLI shall be considered for bench marking transactions with the AE. 8.2 Therefore, the Ground Number 3 of the Assessee is rejected. Ground Number 8 : 9. The assessee vide Ground Number 8 has challenged selection of following comparables by the TPO. * Exillant Technologies Pvt.Ltd. * E-Infochips P Ltd * Nihilent Ltd * Cybage Software P Ltd * Nine Star Information Technologies Ltd. 9.1 The assessee company is in the business of Providing Software Development Services (POSS) to its AE on its own account or through its branches. Assessee had benchmarked the transaction of POSS by using Transactional Net margin Method (TNMM). 10. During the Transfer Pricing Proceedings, the TPO carried out fresh search of comparables using the same criteria as used by the assessee while bench marking the transaction. The TPO had not rejected any of the comparables selected by the assessee. However, the TPO had added certain comparables to the list of comparables on the ground that those comparables were functionally comparable to the assessee, those comparables had appeared in the search conducted by the assessee, however, the Assessee had excluded those comparables. The TPO had....
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....ing the year. It is also observed neither TPO, nor DRP has discussed these events in the orders, though they are very much obvious from the Annual Report. In these facts and circumstances of the case, since Annual Report is not available for the entire year and presence of extraordinary events, we hold that Exilant Technologies Pvt. Ltd., cannot be included in the comparables for the present year. Accordingly, the TPO is directed to exclude Exilant Technologies Pvt. Ltd., from the list of comparables. E-Infochips Pvt. Ltd. : 13. The ld.DRP has upheld inclusion of E-Infochips Pvt. Ltd., in para 7.2(a) of the order as under : "We find that this company is also engaged primarily engaged in sale of products which is similar to the activity of product development carried out by the assessee. As per the annual report it is engaged in Computer programming, consultancy and allied activities and it operates in a single segment and hence does not require segmental data .The assessee is also engaged in SDS and product development activities including maintenance and support, software testing , software updates and software consulting services as discussed in its TPSR (POSS segment). Also ....
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.... report it is engaged in software development activity. The assessee has claimed that this company is into diverse activity has also been made. The assessee also has branches abroad ans derives revenues from these branches .Also as discussed in detail in paragraphs above , under TNMM broad comparability is required and we find that this company is functionally comparable to the assessee. Accordingly we reject the objections raised by the assessee in this regard." 14.1 We have perused the Annual Report of Nihilent Ltd., filed by assessee in the paper book. 14.2 As per the Annual Report of the Nihilent Ltd., the business of Nihilent Ltd., is as under : "Consulting: Nihilent partners with business in transforming their organizations with solutions using a holistic design-thinking led approach to problem solving. Our suite of consulting-led offerings include customer driven digital transformation, industry transformation, and organizational change management services. We have deep expertise and several person-years or experience in strategy alignment and execution, organizational design and process restructuring, balanced scorecards, customer loyalty evaluation among others." Ana....
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....10th of the turnover of the tested party. .............. Hence the claim of turnover of Cybage being 4.6 times does not exclude it from being a valid comparable. The assessee has made general claims that the company Cybage Software (P) Ltd has earned abnormal margins without proving the same." 15.1 The assessee had submitted before the DRP that the Cybage Software (P) Ltd., is functionally not comparable as it is also in the business of ITES, BPO and segmental profit is not available. The DRP has not discussed the impugned claim of the assessee that it is not functionally similar. 15.2 Before us also, the Ld.AR submitted that it is into ITES, BPO. Ld.AR filed copies of the print outs taken from the web site of the Cybage Software (P) Ltd, to demonstrate that it is into ITES, BPO. 15.3 On perusal of the said documents it appears that Cybage Software (P) Ltd.,is also into ITES, BPO Services. It is also mentioned that Cybage Software (P) Ltd., is also involved in branding creative production, content marketing, campaign management.Therefore, we are convinced that Cybage Software (P) Ltd., is functionally dis-similar and hence cannot be accepted as comparable. Accordingly, TPO i....
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....erusal of the Annual Report which is at Page No.5850 to 5949 of the Paper Book filed by the assessee, we could not specifically observe that Ninestar Information Technologies Private Ltd., is in the business of Software Development Services. Therefore, based on the cryptic information available in the Audit Report, it is not possible to understand actual functions performed by Ninestar Information Technologies Pvt. Ltd. Hence, Ninestar Information Technologies Pvt. Ltd., is held to be functionally not comparable with the assessee. Accordingly, the TPO is directed to delete the comparable. 16.4 Thus, Ground No.8 raised by the assessee is Allowed. Ground No.9 (Disallowance u/s 14A) : 17. The Assessing Officer(AO) in the order has mentioned as under : "The assessee submission has been perused and it has been found that during the year, the assessee has earned dividend of Rs. 171252600/- which was claimed as exempt income under section 10(34) of the Act. The assessee has furnished computation of disallowance as per Rule 8D vide letter dated 23/11/2020, Annexure-13b. The assessee has submitted no disallowance u/s 14A of the Act be made directly applying Rule 8D due to there is no s....
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....ey for investing into these investments hence no interest disallowance can be made. The AO has not discussed anything about the fund position of the assessee. On the contrary on perusal of the Balance Sheet as on 31/03/2018, it is observed that Assessee's Equity is Rs. 20,532/- Millon and the Investment is Rs. 5916 Million which is much less. 17.3 The Hon'ble Bombay High Court in the case of PCIT Vs. Godrej & Boyce Mfg. Co. Ltd in IT APPEAL No.1029 OF 2018vide order dated 20/02/2023 has held as under : Quote, "We agree with the view of the ITAT that in the present case the AO has neither examined the claim in respect of expenditure incurred in relation to exempt income of the assessee nor has recorded any satisfaction with regard to the correctness of assessee's claim with reference to the books of account. Consequently, the disallowance made by applying the Rule 8D is not only against the statutory mandate but contrary to the legal principles laid down." Unquote. 17.4 Therefore, respectfully following Hon'ble Jurisdictional High Court(supra), ITAT Pune's decision in assessee's own case(supra), since no satisfaction has been recorded by the Assessing Officer, the disallowan....