TaxTMI 
TaxTMI 
2023 (3) TMI 1507
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....clusions of the authorities below and directions of Dispute Resolution Panel (DRP) u/s 144C in so far it is against the assessee are unsustainable in law; requires to be set aside. Consequently, the additions based on such directions also requires to be set aside. 4. The DRP erred in not considering the relevant materials, evidences, data and relevant law. The directions issued are without application of mind. 5. That the Orders of AO / TPO and the Directions of the DRP violates the principles of judicial discipline as the binding nature of the orders of the higher appellate authorities have been totally ignored. 6. That the order of the AO / TPO / DRP and the directions given therein are bad in law and not as per law requires to be cancelled. That the assessment order dated 23.02.2022 is not in conformity with the directions of the DRP. 7. That the AO/TPO/DRP erred in not providing adequate and sufficient opportunity as required under law thus violating the principle of natural justice, hence on this ground alone the orders requires to be annulled. ISSUE OF TRANSFER PRICING 8. That the order of the Transfer Pricing Officer is w....
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....stribution segment amounting to Rs. 1,744,326,236/-. b) The Learned AO / TPO / DRP erred in making adjustment on transactions beyond AE transactions, thus, the adjustment proposed includes non AE transactions. c) The Learned AO / TPO / DRP erred in wrongly adopting the financial results of the assessee. d) The Learned AO / TPO / DRP erred in comparing the appellant's distribution margin with comparables which are not in the business of trading/distribution. e) The Learned AO / TPO / DRP erred in not following their own orders passed for the earlier assessment years on this issue. f) The selection of the method by the Learned AO / TPO / DRP is not as per law. g) The Learned AO / TPO / DRP erred in not granting the variances deduction envisaged in the Act and Circular. h) The Learned AO / TPO / DRP erred in not carrying out the adjustments as required under law as well as the facts. i) The Learned AO/TPO/DRP have failed to identify a comparable in terms of Rule 10B(3). j) The Learned AO/TPO/DRP erred in rejecting certain comparables on unsustainable and untenable grounds/reasons while considering compara....
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.... TPO / DRP erred in wrongly adopting the financial results of the assessee. e) The Learned AO/TPO/DRP have failed to identify a comparable in terms of Rule 10B(3). f) The Learned AO/TPO/DRP erred in rejecting certain comparables on unsustainable and untenable grounds/reasons while considering comparables which failed to meet the filters /criteria as required under law. g) The Learned AO / TPO / DRP erred in not granting the variances deduction envisaged in the Act and Circular. h) The Learned AO/TPO/DRP have failed to apply the provisions of Rule 10B(4)&(5) and 10CA(2) while selecting the criteria and filters. i) The learned AO/TPO/DRP erred in rejecting R & D expense more than 3% on turnover to eliminate companies engaged in R & D activities. j) The learned AO/TPO/DRP erred in applying the software development service income threshold of 75% to sales to select comparable companies. k) The learned AO/TPO/DRP erred in applying export turnover threshold of 75% to sales to select comparable companies. l) The learned AO/TPO/DRP erred in rejecting the comparable companies having ratio of employee cost to sales less ....
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....11 are relating Transfer pricing general grounds, which do not require adjudication. Ground No.12:- (Royalty - Rs.71,58,08,823/-) 3. Facts of the case are that the assessee has paid royalty of Rs.71,58,08,823/-. Royalty has been paid having regard to the support services by the Group company. The assessee is in the business of advanced diagnostic equipment. After sales support becomes a critical component for the equipment sold. The assessee's group affiliates have extended a unique condition wherein the equipment is under constant monitoring through the network of satellites. The advantage of such a system is that it allows remote monitoring besides remote maintenance. The assessee is a beneficiary of such facility. It would have cost hundreds of millions of dollars to have an own exclusive facility besides the assessee also does not have such technology to put up the facility. It would not have made any economic sense to facilitate such facility independently. Thus the payment of royalty enhances the commercial value for the business of the assessee. 3.1 The ld. A.R. in his written submissions has submitted that the ITAT vide its order for AY 2005-06 & 2006-07 in IT(TP)A....
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....hat he has done on earlier occasion without considering the direction of the Tribunal where the Tribunal given a direction that in case comparable is not found in respect of payment of royalty by the assessee, then the TPO/AO may consider the royalty payment on part of the international transaction under trading segment and determine the ALP by considering the royalty as part of operating cost for the purpose of computing the margin in the trading segment. Before us, Ld. A.R. submitted that if it is considered as operating cost, then the margin of the assessee is higher than the margin of comparable i.e. M/s. Advance Micronic Devices Ltd. In our opinion, the AO has to consider this royalty payment as an operating cost and has to verify whether the margin of assessee is higher than the margin declared by the comparable company i.e. M/s. Advance Micronic Devices Ltd. and decide accordingly. In view of this, the issue in dispute is set aside to the file of AO/TPO for the limited purpose for comparison of margins with the comparable company and decide accordingly.'' 3.3 The ld. A.R. further submitted that the Tribunal in assessee's own case for AY 2012-13 in IT(TP)A 703/Bang/2021 da....
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....sing International, Inc. based at Delaware, USA. The assessee was asked to submit the details of this payment along with the agreements. The assessee submitted the agreement dated November 21, 2000 between M/s. Monogram Licensing International, Inc. based at Delaware, USA and Wipro GE. As per the agreement submitted by the assessee, General Electric Co. owns all the licenses and it has licensed the AE M/s. Monogram Licensing International Inc. to license the licensed marks. In reply to the showcause notice, the assessee has stated as follows: "The taxpayer submitted that it pays royalty at I% of net selling price of products and services .for using the licensed name of the AE in the applicable jurisdiction. The trademark is used in packaging, advertising, instruction book and other literature relating to the product. The trademark and the trade name of the GE company helps WGE add credibility and without the trademark and trade name of the GE company the products sold by WGE will be a generic product which will neither command the price it is currently sold at nor have any buyers in the highly technology driven precision industry and also in gaining demand for its product.....
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....t is further observed by the TPO that the DRP has upheld the adjustment of Royalty to Nil in the assessee's own case for the AY 2014-15. The DRP has held that "In the case of JCB India Ltd v Deputy Commissioner of Income tax Circle13(1),New Delhi ,the ITAT Delhi has held that where the assessee company engaged in manufacture of construction equipment ,paid Royalty to its AE for usage of a particular machine ,since said transaction of payment of Royalty was independent of other transactions, assessee's contention of applying TNNM on entity level could not be accepted and ALP of transaction in question was to be determined separately under CUP method. Even though in transfer pricing proceedings, aggregation of related transactions is permissible, -yet there is no rule that all related and unrelated transactions can be combined and shown at ALP under TNNM entity level." 4.5 The ld. TPO observed that in the case of Sony Ericson Mobile Communication India Pvt. Ltd. it has been held that 'it would not be proper and appropriate to apply the TNMM method in case of Indian assessed is engaged in manufacturing activities and distribution and marketing of imported....
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....re intended to be simultaneously accepted or these are so closely linked that one cannot at all stand without the other. If the above criteria is satisfied, then, two or more related transactions can be considered as one international transaction for the purpose of determining their ALP. On the contrary, if the above criteria is not satisfied, then, these transactions are to be viewed separate from each other and, accordingly, their ALP should also be determined in a distinct manner as if these are two separate independent transactions. The ld. TPO finally concluded that mere fact that both the intra-group services and goods are utilized by the assessee for the manufacture of the final product, cannot be treated decisive to consider such separate transactions as a single transaction. 5. The ld. DRP confirmed the findings of the ld. TPO. Against this assessee is in appeal before us. 6. We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in assessee's own case in assessment years 2005-06 & 2006-07 in ITA Nos.701&701/Bang....
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.... then determine the ALP by considering the royalty as part of operating cost for the purpose of computing the margin in the trading segment.'' 3.4 During the set aside proceedings, the assessee vide reply dt.05.06.2019 submitted that by considering royalty payment as part of the international transaction under trading segment, the margin of the assessee is higher than that of the comparable company. However, the TPO in para 4.5 & 4.6 has stated as follows: ''4.5 During the set aside proceedings, the taxpayer has not identified any comparable in respect of the royalty payment. Since the TPO has chosen the company, M/s Advanced Micronic Devices Ltd., as a comparable to the taxpayer, in the trading segment, the same is considered as comparable for the royalty transaction also. 4.6 The R&D expenses of the comparable & royalty over net sale is considered as per the annual report for the current year is: Sl No Company name R&D Exp Royalty/ trademark Net sale Margin over sale 1 Advanced Micronic Devices Ltd. 0 0 2684.75 lakhs 0% Average 0% The computation of ALP of the roy....
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.... a direction that in case comparable is not found in respect of payment of royalty by the assessee, then the TPO/AO may consider the royalty payment on part of the international transaction under trading segment and determine the ALP by considering the royalty as part of operating cost for the purpose of computing the margin in the trading segment. Before us, Ld. A.R. submitted that if it is considered as operating cost, then the margin of the assessee is higher than the margin of comparable i.e. M/s. Advance Micronic Devices Ltd. In our opinion, the AO has to consider this royalty payment as an operating cost and has to verify whether the margin of assessee is higher than the margin declared by the comparable company i.e. M/s. Advance Micronic Devices Ltd. and decide accordingly. In view of this, the issue in dispute is set aside to the file of AO/TPO for the limited purpose for comparison of margins with the comparable company and decide accordingly. 4. Next ground No.8 is with regard to sustaining addition of Rs.2,42,33,641/- u/s 37 of the Act by holding that it was wholly and exclusively incurred for the purpose of business. Facts of this case are that this issue has b....
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....ition to furnish the particulars (name, address, evidence of deduction of TDS, etc.) in respect of persons to whom commission amounting to Rs.2,42,33,641/- have been paid pertaining to AY 2005-06. Therefore, he is not in a position to prove identity of the payee, genuineness of expenses incurred and substantiate that expenses are incurred wholly and exclusively for the purpose of business. The assessee's claim of following the practice of accounting also could not be substantiated as the assessee is unable to discharge the primary onus of establishing the identity and the genuineness of the transaction. In view of the circumstances, Ld. DRP held that the assessing officer has correctly held that the dealer commission amounting to Rs.2,42,33,641/- has not been incurred wholly and exclusively for the purpose of business. 4.4. We have heard the rival submissions and perused the materials available on record. The assessee claimed that it has paid a sum of Rs.2,42,33,641/- towards commission to dealers and according to the assessee, it is wholly and exclusively incurred for the purpose of business. Further, assessee submitted the list of payments made to various parties and als....
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....chiller Healthcare India Pvt. Ltd. 32.70 35th Percentile 1.72% Median 4.37% 65th Percentile 4.56% Out of the 7 comparables selected by the Appellant, the TPO has rejected 5 of them. Final Comparables selected by TPO; Sl No Company Name Wt. PLI (OP/OR)% 1 Frontline Electro Medical Ltd 3.66 2 Hicks Thermometers (India) Ltd. 3.92 3 Schiller Healthcare India Pvt. Ltd 7.57 4 Terumo India Pvt. Ltd. 10.70 5 Everest Instruments Pvt. Ltd. 11.03 6 Confident Sales India Pvt. Ltd. 12.51 7 Indifoss Analytical Pvt. Ltd. 13.22 8 Narang Medical Ltd. 13.81 35th Percentile 7.57 Median 10.87 65th Percentile 12.51 Computation of arm's length price by the TPO and the adjustment made: Operating Revenue (OR) Rs.22,45,27,33,074/- Operating Cost (OC) Rs.21,75,64,47,225/- Median Margin of Comparable set (M) 10.87% Arm's Length Price (ALP) = (1-M)*OR Rs.20,01,21,20,989/- Price Paid Rs.21,75,64,47,225/- Adjustment u/s 92CA Rs.1,74,43,26,236/- 6.1 The ld. A.R. submitted that the adjustment ma....
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....herein the TPO accepted the margin computation/results of the assessee and deleted the TP adjustment. The issue stands concluded in this manner. The same is extracted hereunder: 6.4 The ld. A.R. submitted that similarly, the Tribunal in assessee's own case for the AY 2005-06 vide order dt.21.04.2017 in IT(TP)A 40/Bang/11 and 1647/Bang/2013 held that the adjustment on account of transfer pricing can be made only in respect of the international transaction and in this case to be confined to the purchases made from AE. Relevant portion is extracted hereunder: ''15. Having considered the rival submissions as well as the relevant material on record, we find that the TPO while computing the ALP has apparently taken the gross profit margin of the AMDL at entity level by assuming that the entire activity of AMDL is only trading in the medical equipments. So far as the issue of considering the segmental details of the comparable companies, on principle we do not find any error on this point as the comparability of the assessee's trading segment in medical equipment has to be determined by considering the same segment of the comparable companies in the same activity. Therefor....
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....h the direction of ITAT for earlier years and the Learned CIT-A vide order dated 18.09.2013 deleted the TP adjustment in trading segment as the margin of the assessee was higher compared to that of the comparable. There has been no appeal by the department against the CIT-A order on this issue and thus stands concluded. Thus for the earlier years the lower authorities have followed the binding decision of the Tribunal in assessee's own case. 6.7 In the impugned year the AE purchases are Rs.875,98,67,002/- in the trading segment. The assessee's margin for the impugned year as calculated by applying RPM method and considering AE purchases as the international transaction in the manner directed/accepted by the Tribunal and lower authorities in earlier years is hereunder: 6.8 The ld. A.R. submitted that in line with the treatment given to AY's 2002-03 to 2004-05, AY 2005-06 & 2006-07 the margin of the assessee has been calculated at 124.92%. As mentioned supra, the TPO for the impugned year has considered 8 comparables at a median margin of 10.87%. Since the assessee's margin is higher than that of the comparables chosen by the TPO, no adjustment is required in the trading segmen....
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....f appeal is partly allowed for statistical purposes.'' 6.11 In view of the above, the ld. A.R. submitted that since the facts and law are the same, on the parity of reasoning the TP adjustment in the trading segment is to be deleted. Alternatively, the direction given by the Tribunal for AY 2012-13 in IT(TP)A 703/Bang/2021 and AY 2016-17 in ITA 285/Bang/2021 dated 03.02.2023 extracted supra may be followed for the impugned year as well. 7. The ld. D.R. relied on the orders of the lower authorities. 8. We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that same issue came for consideration before this Tribunal in assessee's own case in AY 2016-17 in IT(TP)A No.285/Bang/2021 dated 3.2.2023 wherein held as under: "7. Ground No.13 of the assessee's appeal is reproduced as under: 13. i) The Learned AO / TPO / DRP erred in making adjustment towards the Arm's Length Price difference in the distributor segment amounting 253,10,21,733/-. ii) The Learned AO / TPO / DRP erred in making adjustment on transactions beyond AE transactions, thus, the adjustment proposed in....
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....tment on the same issue. xv) The Learned AO/TPO/DRP have failed to apply the provisions of Rule 10B(4)&,(5) and 10CA(2) while selecting the criteria and filters. xvi) The Learned AO / TPO / DRP erred in not carrying out the adjustments like risk, working capital, et:c., as required under law as well as the facts. xvii) The learned AO/TPO/DRP erred in rejecting the price per unit adjustment carried out by the appellant xviii) The learned AO/TPO/DRP erred in rejecting the import duty adjustment carried out by the appellant. xix) The learned AO/TPO/DRP erred in not considering the after sales support service segment while determining operating margin of distribution segment. xxi) The learned AO/TPO/DRP erred in rejecting the corroborative analysis provided by the appellant. xxii) The Learned AO/TPO/DRP erred in applying the trading income threshold of 75% to sales to select comparable companies. - xxiii) The learned AO/TPO/DRP erred in applying the Related party transactions threshold of 25% to revenues to select comparable companies. xiv) The learned AO/TPO/DRP erred in not applying the Turnover filter a....
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.....17 35th Percentile 4.93 Median 6.79 65th Percentile 7.41 Computation of arm's length price by the TPO and the adjustment made: Operating Revenue (OR) Rs.1769,15,48,168/- Operating Cost (OC) Rs.1902,13,13,780/- Adjusted Arm's length Margin 6.79% of operating revenue Arm's Length Price (ALP) (100%-6.79% = 93.21%) of operating revenue Rs.1649,02,92,047/- Price Received Rs.1902,13,13,780/- Adjustment u/s 92CA Rs.253,10,21,733/- 7.2 The adjustment made by the TPO of Rs.253,10,21,733/- in the Distribution Segment has been adopted by the AO in the Draft assessment order u/s 143(3) rws 144C(1) of the Act dated 30.12.2019. The assessee filed objections before DRP on 27.01.2020. The assessee filed its written submissions before DRP on 29.01.2021 emphasizing on the binding decisions of the Tribunal in assessee's own case for earlier years. Without appreciating the submissions of the assessee, the DRP passed its directions u/s 144C(5) on 11.02.2021 rejecting the grounds. The AO passed the final assessment order u/s 143(3) rws 144C(13) and 144C(13) rws 143(3A) & 143(3B) of the Act dated 30.03.....
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.... Comparables selected by Assessee in TP report and their arithmetic mean: Sl. No. Name of the company ( %) 1 ADS Diagnostic Limited 8.41 2 Advanced Micronic Devices Ltd 2.07 3 Central Scientific Supplies Co. Ltd -0.15 4 Frontline Electro Medical Ltd 0.01 5 Kusum Electrical Inds Ltd 9.84 6 Softouch Hygiene Products Ltd 10.41 Arithmetical Mean 5.10 28.3 Out of the 6 comparables selected by the Assessee, the TPO accepted the 1 highlighted above, viz. Advanced Micronic Devices Ltd and rejected the other 5 comparables. 28.4 Final Comparables selected by TPO and their arithmetic mean: Sl No Company Name (OP/OR) (in%) 1 Maestors Medline Systems Ltd (seg) 29.57 2 Advanced Micronic Devices Ltd (seg) 7.29 Average 18.43 Computation of arm's length price by the TPO and the adjustment made: PLI Margin 18.43 OR 1388,87,76,432 ALP* 81.57% 1132,90,74,935 OC 1341,57,47,576 Shortfall 208,66,72,641 Value of International Transaction (to be benchmarked) 791,22,27,227 Percentage to Total Co....
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.... passed by the TPO dt.09.07.2013 for AY 2002-03 to 2004-05 wherein the TPO accepted the margin computation/results of the assessee and deleted the TP adjustment. The issue stands concluded in this manner. The same is extracted hereunder: 28.9 Similarly, the Tribunal in assessee's own case for the AY 2005-06 vide order dt.21.04.2017 in IT(TP)A 40/Bang/11 and 1647/Bang/2013 held that the adjustment on account of transfer pricing can be made only in respect of the international transaction and in this case to be confined to the purchases made from AE. Relevant portion is extracted hereunder: ''15. Having considered the rival submissions as well as the relevant material on record, we find that the TPO while computing the ALP has apparently taken the gross profit margin of the AMDL at entity level by assuming that the entire activity of AMDL is only trading in the medical equipments. So far as the issue of considering the segmental details of the comparable companies, on principle we do not find any error on this point as the comparability of the assessee's trading segment in medical equipment has to be determined by considering the same segment of the comparable c....
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....th the direction of ITAT for earlier years and the Learned CIT-A vide order dated 18.09.2013 deleted the TP adjustment in trading segment as the margin of the assessee was higher compared to that of the comparable. There has been no appeal by the department against the CIT-A order on this issue and thus stands concluded. Thus, for the earlier years the lower authorities have followed the binding decision of the Tribunal in assessee's own case. 28.12 It may be noted that the same TPO i.e, DCIT, TP-2(2)(1), Bangalore passed the Order giving effect for both AY 2005-06 and AY 2012-13 on the same day 28.10.2019. Though TPO followed the specific direction of the ITAT for AY 2005- 06, the same was not followed for the AY 2012-13. Thus the TPO has been inconsistent in her own approach. The TPO is in error in not following the orders of the Tribunal in assessee's own case which is a binding precedent. The TPO has tried to take a contrary position on an issue which has been overwhelmingly settled in the earlier years. There being no change in fact or law it was imperative for the TPO to follow the same method of computation as done earlier. Not doing so amounts to violation of law a....
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....A.R. on this issue is that AO/TPO/DRP has not considered the earlier decision of Tribunal in A.Y. 2002-03 to 2004-05, 2005- 06, 2006-07, as such order passed by the lower authorities is bad in law. The Judicial discipline requires consistency in its proceedings. The AO/TPO what criteria followed in earlier year for determining the ALP, the same to be followed in next assessment year unless and until there is a change in facts of the case. In the present case, the Ld. D.R. not brought on record any change in circumstances to deviate from earlier order of the Tribunal for the assessment year especially 2005- 06 and 2006-07 in IT(TP)A No.40/Bang/2011 & 1647/Bang/2013 dated 21.4.2017 wherein the Tribunal followed the earlier order of the Tribunal for the AY 2002-03 and 2004-05, which has been reproduced in earlier para of this order. Being so, we direct the AO/TPO to pass fresh order in the light of above observation of the Tribunal in AY 2005-06 and 2006-07. Once the AO/TPO pass the order in conformity with earlier order of the Tribunal, other issue raised by the assessee with regard to comparables is infructuous. This ground of assessee is partly allowed for statistical purposes." ....
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.... Wt. Avg (%) Remarks of the TPO 1 Axiscades Engineering Technologies Ltd. 16.74 No data available, hence rejected 2 C G-V A K Software and Exports Limited 11.97 Accepted 3 E-Zest Solutions Ltd. 8.48 No data available, hence rejected 4 Harbinger systems Pvt. Ltd 9.28 Accepted 5 Larsen and Toubro Technology 18.09 Accepted 6 Mindtree Ltd. 19.41 Accepted 7 Nintec Systems Ltd. 19.00 Functionally different: hence rejected 8 O F S Technologies Ltd. 24.86 Accepted 9 RS Software Limited 19.25 Failed Export filter, hence rejected 10 R Systems International Limited (Segmental) 26.56 Accepted 11 Rheal Software Ltd. 2.66 Accepted 12 Sagarsoft (Inda) Ltd 3.22 Functionally different: hence rejected 13 Sasken Technologies Ltd 0.04 Fails export income filter and also functionally different. Hence rejected 14 Tata Elxsi Limited 25.16 Accepted Out of the 14 comparables selected by the appellant, the TPO accepted 8 comparables and rejected 6 other comparables. Th....
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....usion/inclusion of comparables on various grounds. 9.5 The ld. A.R. submitted that the appellant is seeking exclusion of all the comparables chosen by the TPO. The appellant is seeking inclusion of Axiscades Engineering Technologies Limited, Sagarsoft (India) Ltd and Sasken Technologies Ltd as comparables. 9.4 On the issue of turnover filter, the ld. A.R. submitted that the TPO has excluded companies having turnover of less than Rs.1crore. It is the view of the TPO in para 16 of the TP order that the exclusion of comparables on the basis of size and turnover of the companies is not justified in view of the decisions in Societe Generale Global Solution Centre P Ltd vs DCIT in IT(TP)A 1188/B/2011 and Capgemini India Pvt Ltd vs ACIT in ITA 7861/Mum2011. The DRP has held that comparables cannot be excluded on the ground of size and level of operations. 9.5 The ld. A.R. submitted that the ITAT Bangalore in the case of Fulcrum Fund Services (India) Pvt Ltd vs ITO in IT(TP)A 2521/B/2017 dt.12.04.2019 by considering wide range of decisions on this issue including that of Chryscapital Investment Advisors India (P) Ltd vs DCIT (held as obiter dicta) and the other decisions mentioned....
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.... Aptus Software Labs Pvt. Ltd. 3.86 11 OFS Technologies Ltd 4.59 12 Cygnet Infotech Pvt. Ltd. 51.65 13 Infosys Limited 59840 14 Threesixty Logica Testing Services Pvt. Ltd. 32.11 15 Consilient Technologies Pvt. Ltd. 4.15 9.8 The turnover of the above companies are far higher/lower than that of the assessee company. Since the appellant falls under category of companies having turnover between Rs.200crores to Rs.2000crores, the above comparables needs to be excluded. 9.9 The ld. A.R. submitted that regarding the company R System International Ltd, the DRP had rejected it as comparable as it fails the different financial year ending filter. However, the AO/TPO did not give effect to the same while passing the final assessment order. The DRP direction is extracted hereunder: Hence the ld. A.R. requested that R System be removed from the list of comparables. 9.10 Regarding the comparables Persistent Systems Ltd and Nihilent Ltd. the assessee had objected before the TPO and DRP that the same are not functionally comparable, however the DRP rejected the objections of the assessee. The ld. A.R. submitted that the Banga....
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.... Before us, the Ld.DR has not been able to place anything on record contrary to the above observation. We therefore respectfully following the above view, direct the Ld.AO/TPO to exclude Persistent Systems Ltd., L& T Infotech Ltd., Thirdware Solutions and Infosys Ltd. from the final list. 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) ...... "Nihilent Analytics Ltd. (Nihilent) 44. The assessee sought exclusion of Nihilent on ground of its functional dissimilarity vis-à-vis assessee. We have examined the website information of Nihilent, made available by the assessee at page No.405 of the paper book, wherein it is mentioned that it is engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data science, cloud services etc. 45. Perusal of the disclosure of enterprise's reportable segment explanatory available at page No.A406 of the paper book....
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.... ITA 285/Bang/2021 dated 03.02.2023 considering the above decision in Sandisk has rejected Persistent Systems Ltd. and Nihilent Ltd as comparables. In consideration of the same, the ld. A.R. requested that the companies Persistent Systems Ltd. and Nihilent Ltd. be removed from the list of comparables for the impugned year as well. 9.12 Regarding the comparable Tata Elxsi Ltd., the assessee had objected before the TPO and DRP that the same is not functionally comparable. However, the TPO and DRP rejected the objections of the assessee. The ld. A.R. submitted that the TPO in assessee's own case for earlier assessment years 2013-14 and 2016-17 has rejected Tata Elxsi as functionally dissimilar to that of the assessee. He submitted that the company Tata Elxsi has been rejected as functionally dissimilar in a catena of decisions till date for all the assessment years. Recently, the Hyderabad Tribunal in the case of ADP Pvt Ltd vs DCIT - ITA 227 & 228/Hyd/2021 dt.03.02.2022 for AY 2016-17 has rejected Tata Elxsi as a comparable. Relevant portion is extracted hereunder: ''5. Tata Elxsi Ltd. (Segmental): The ld. AR of the assessee submitted that this company renders high-end KP....
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....sidered similar objections of the assessee therein and has held that these two companies along with Thirdware Solutions Ltd is not comparable to the software development company like the assessee before us. The relevant portions has been reproduced by us in the above paras. Respectfully following the same, these two companies are also directed to be excluded from the final list of ITA No 2233 of 2018 ADP Private Ltd Hyderabad comparables. Thus, assessee's ground of appeal No.2 is partly allowed." 5.3 In the said decision, it has been held that the company is functionally different and engaged in diversified activities and since the revenue could not controvert the said decision nor brought any contrary decision, following the same, we direct the AO/TPO to exclude this company from the final list of comparables.'' 9.13 In view of the above, the ld. A.R. requested that Tata Elxsi Ltd. be removed from the list of comparables 9.14 Regarding the comparable Cybage Software Pvt. Ltd., the assessee had objected before the TPO and DRP that the same is not functionally comparable, lacks segmental information and has extraordinary high margins. However, the TPO and DRP reje....
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....give effect to the same while passing the final assessment order. The DRP directions in this regard is extracted hereunder: Hence the ld. A.R. requested that the above two companies be included in the list of comparables. 9.18 Regarding Sasken Communication Technologies Ltd. - the ld. A.R. submitted that this company has been considered as a comparable in the TP report by the assessee. The TPO rejected this as a comparable on the basis of functional dissimilarity. The assessee prayed for inclusion of the company before the DRP. The DRP vide its directions dated 25.01.2022 rejected the company as functionally dissimilar and upheld the action of the TPO. Howsoever the DRP vide its directions dated 11.02.2021 for AY 2016 -17 in para 3.9.2 directed the AO/TPO to include the software services segment margin for the purpose of comparability. Relevant portion is extracted hereunder: '' 3.9.2.1 Panel: Having considered the submissions, and on perusal of the annual report, we note that this company is engaged in providing Software services including network engineering services and is functionally comparable to the assessee. As per information in the annual report, the compan....
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....% Functionally different Rejected by the DRP on the dissmilarity but no effect given Fails turnover filter Fulcrum Fund Services (India) Pvt. 2521/B/2017 dt.12.04.2019 3 Infomile Technologies Ltd. TPO 2.23 10.43 No RPT Information Rejected by the DRP on the ground disclosure of RPT information but Fails turnover filter Fulcrum Fund Services (India) Pvt. Ltd. 4 Harbinger Systems Pvt Ltd TPO & Assessee 62.41 14.10 Fails turnover filter Fulcrum Fund Services (India) Pvt. Ltd. 5 C G- V AK Software & Exports Ltd. TPO & Assessee 11.62 15.09 Fails turnover filter Fulcrum Fund Services (India) Pvt. 2521/B/2017 dt.12.04.2019 6 Larsen & Toubro Infotech Ltd. TPO & Assessee 6,182.90 21.10 Fails turnover filter Fulcrum Fund Services (India) Pvt. 2521/B/2017 dt.12.04.2019 7 Great Software Laboratory Pvt. TPO 132.98 21.24 Fails turnover filter Fulcrum Fund Services (India) Pvt. Ltd. ....
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....turnover filter Fulcrum Fund Services (India) Pvt Ltd - IT(TP) A 2521/B/2017 dt.12.04.2019 PB-II, page 595, para 7.3.1 19 Cybage Software Pvt. Ltd. TPO 758.86 57.82 Functionally different and Abnormal High Margins Rejected by the Hon'ble ITAT in assessee's own case for AY 201617 in ITA 285/B/2021 vide order dated 03.02.2023 based on the decisions in Optiva India Technologies Pvt Ltd - ITA 194/Pun/2021 dt.21.07.2022 and Infor (India) Pvt PB-III, page 20 Consilient Technologies Pvt Ltd. TPO 4.15 65.14 Fails turnover filter Fulcrum Fund Services (India) Pvt Ltd - IT(TP) A 2521/B/2017 dt.12.04.2019 PB-II, page 595, para 7.3.1 LIST OF COMPANIES SEEKING INCLUSION AS COMPARABLE IN SOFTWARE SEGMENT 35th Percentile 21.24 Median 26.18 65th Percentile 26. 46 Sl. No. Name of company Comparable of Turnover (in crs) Operating Revenue OP/OC % Comparable margin Included as comparable On Grounds Included as comparable in Page/ Para 1 Axiscades Engineering Assessee 231.97 16.74 16.74 Functionally comparable DRP has ....
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....debited as finance cost in note 2.28 of the financial statements) Depreciation on assets taken on finance lease - Rs. 13.29 crores (Rs.13.26 crores on Vehicles + Rs. 0.03 crores on Office Equipment debited in the books of accounts, note 2.1 Fixed Assets of the financial statements). Thus in total assessee has disallowed Rs.16.78 crores (Rs.3.49 crores +Rs.13.29 crores). As against such a disallowance it has claimed Rs. 18,69,97,941/- as allowable. 11.3 The ld. A.R. submitted that the disallowance made by the AO is unsustainable being double in nature. The difference in approach between the accounting of lease transaction and claim for lease rentals in the income tax assessment is consistent with the past years and the same has been accepted by the department. The ld. A.R. prayed that since the method of allowance of rent is a part of method of accounting consistently followed, no departure is called for unless the circumstances mentioned in section 145 of the Act warrants the same. 11.4 He further submitted that the ITAT Bangalore under similar facts and circumstances in the case of Texas Instruments (India) Pvt Ltd vs JCIT in ITA 852 & 831/B/2017 dt.29.06.2022 has allowed....
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....available on record. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in the case of Texas Instruments (India) Pvt. Ltd. Vs. JCIT in ITA Nos.852 & 831/Bang/2017 dated 29.6.2022, , wherein held as under: --------- 15.1 In view of the above, taking a consistent view, we remit this issue to the file of AO/TPO on similar lines. This ground of appeal is partly allowed.'' 11.6 In view of the above, the ld. A.R. prayed that the disallowance u/s 37 of the Act Rs.18,69,97,941/- be deleted in the interest of justice. 12. The ld. D.R. relied on the orders of the lower authorities. 13. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in ITA No.285/Bang/2021 dated 3.2.2023 for the AY 2016-17, wherein held as under: "14. Ground No.15 of the assessee's appeal is reproduced as under: The Learned AO/DRP erred in disallowing deduction claimed of Lease payments on financial lease of Rs. 26,12,77,130/- under section 37 of the I T Act. 14.1 Facts of the case are that during the course of assessment proceedings the assessing ....
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....wards interest on finance lease. The assessee is aggrieved as neither lease rental is allowed nor the payment of interest and depreciation on the assets, 14.3 The ld. DRP observed that the contention of the assessee is that the AO has not given sufficient time to file the details and the details are voluminous in nature. However, the assessee has not filed these details before the panel as well. If the assessee claims that it was not given sufficient time by the AO to file the voluminous details., it should have filed the details at least before the panel to substantiate it's argument. Nothing prevented the assessee from filing before the panel. As relevant details have not been filed before the ld DRP, the submission made by the assessee remained unsubstantiated. Although sufficient time has lapsed since filing of objection before the panel and the matter was heard several times by the ld. DRP, yet the assessee has filed nothing beyond written submission which remained unsubstantiated for want of supporting documents. As the assessee has not produced details such as lease agreements and other supporting evidences, the ld. DRP was not in a position to agree with the ar....
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....ease. This agreement is dated 29.08.2005. A copy of the lease agreement is available on pages 181 to 189 of the assessee's PB. The assessee also entered into a lease agreement in respect of certain vehicles with GE Capital Transportation Financial Services Ltd. This agreement is dated 28.12.2004 , which is placed at page Nos.568 to 585 of the assessee's PB. Another lease agreement for vehicles dated 21.03.2007 was entered into by the assessee with GE Mani Financial Services Ltd., which is at pages 586 to 603 of the assessee's PB. Under this agreement also, the assessee took certain vehicles on lease. The assessee paid lease rentals amounting to Rs.2,30,59,332 towards lease rentals for lease of equipment and a sum of Rs.7,75,20,,788 towards lease of motor cars. 41. In view of Accounting Standards AS-19 issued under the Companies (Accounting Standards) Rules, 2006, the assessee in its books of accounts treated itself as the owner of the asset and capitalized the value of the equipment as well as the vehicles in its books of accounts. Depreciation was computed and debited in the P&L A/c. The following accounting treatment was adopted by the assessee as per AS 19, in the case ....
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....eased assets and the lessee would be entitled to deduction with respect to the lease rentals. Given the above, the tax treatment of the assets taken on finance lease (both equipment and car lease) in the case of lessee was as summarised below. * The depreciation on the leased assets which are capitalised in the books is added back to the taxable income; * Interest component which is already debited in the books as finance charges is added back to the taxable income; * The entire monthly instalments (which includes the interest charges) is claimed as deduction from the taxable income; * Any profit / loss arising on account of disposal of the leased asset which is charged to the profit and loss account are to reduced / added back respectively to the taxable income. 43. In light of the above, the Assessee submitted that the Assessee has made the following adjustments (on account of the leased assets) to its net profits to arrive at its taxable profits:- * The depreciation on assets acquired under finance lease is added back to net profits; * The finance charges of Rs 15,250,304 have been added back to the net profits; ....
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....e finance charges on lease and reduced lease rentals paid. Therefore, whatever be the position with regard to the books of account in compliance with AS-19; as far as computation of the total income for the purpose of the Act is concerned, the assessee has made claim only for deduction on account of lease rentals paid. There is no basis for the Revenue authorities to come to a conclusion that the assessee has adopted a colourable device with a view to gain tax advantage. In this regard, we find that the AO as well as the CIT(A) have quoted various clauses of the lease agreement out of context, ignoring the main clause in the agreement which clearly lays down that the assessee is only a lessee and the lessor is the owner of the assets leased. In such a scenario, the conclusion of the Revenue authorities cannot be sustained. The assessee is entitled to claim deduction on account of lease rentals paid as it is a Revenue expenditure. 47. In so far as the applicability of the provisions of section 40(a)(ia) of the Act is concerned, the Hon'ble High Court of Karnataka in assessee's own case on an identical issue for Assessment Year 2008-09 in the decision reported in [2021] 127 ....
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.... assets Import of equipment for resale. Payment of Royalty for use of trademark Provision of marketing services Software Development Provision of software development services No international transaction has been reported from service sector. In addition to the above there are reimbursement of expenses between WGE & its affiliates. transactions As per the directions of the Ld CIT(A), the international-transations-thews in the trading segment consists of 1. Purchases from AES 2. Purchases from Non-AES 3. Local purchases & other total costs 204,70,55,257 30,69,76,652 64,64,57,005- The purchases from AES of Rs.204,70,55,257/- is adopted in making the ALP adjustment towards Trading segment instead of Rs.372,73,04,153/- adopted by the TPO in his order. The Margin earned by Wipro GE Medical Systems is as under: Total Sales of Trading Less: Local Purchases & Imports from Non Affiliates Import Non Affiliates/Local Purchase Other local costs - Installation and warranty Costs, accessories, etc., 306,976,752 24,830,157 Rs. 3,464,149,383 Less: Paid to affiliates as purchase price Margin carned 2.047.0....
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....port Non Affiliates/Local Purchase Rs. 3,198,159,596 271,498,479 Other local costs - Installation and warranty Costs, accessories, etc., 540,639,044 Less: Paid to affiliates as purchase price 1.598.378.274 2410.515.797 Margin earned 787,643,799 Margin as % of purchase 49.28% Margin as % of sales 24.63% The margin earned by Advanced Micronics Devices Limited is as under Trading Sales Less: Purchase of traded goods (Rupees in Crores) 41.52 33.57 7.95 Margin as % of purchase Margin as % of sales 23.68% 19.15% As the margin earned by the taxpayer is not less than the TPO's comparable margin, the international transactions are treated as at arm's length. ISSUE NO. 2- MOST APPROPRIATE METHOD The Ld. CIT(A) has directed to adopt Resale Price Method (RPM) instead of Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) since the trading segment involves purchases of goods which is resold. Therefore, the RPM is treated as MAM. ISSUE NO. 3-COMPARABLE As directed by the Ld. CIT(A), the only comparable considered is M/s. Advanced Micronics Devices Ltd. (AMDL). Document 2 ....
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....in is envisaged on these purchases as customers themselves can procure these items directly from the suppliers. No profit element is envisaged on the outgo such as Customs duty, freight,etc., 8,83,71,64,489 10,94,24,18,930 124.92% 55.32% Document 4 TPO's FINDINGS: ISSUE NO. 1-INTERNATIONAL TRANSACTIONS AY-2002-03: The International transactions reported by the taxpayer pertains to: Medical Equipment Sector Distribution Manufacturing Sale of finished goods Import of components Provision of Engineering services Payment of Royalty for use of trademark Import of assets Import of equipment for resale. Payment of Royalty for use of trademark Provision of marketing services Software Development Provision of software development services No international transaction has been reported from service sector. In addition to the above there are reimbursement of expenses between WGE & its affiliates. transactions As per the directions of the Ld CIT(A), the-international-transnations for the Als in the trading segment consists of 1. Purchases from AEs 2. Purchases from Non-AES 3. Local purchases & other tot....
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....nsactions are treated as at arm's length. AY-2004-05: As per the directions of the Ld CIT(A), the international transactions from the AEs toward purchases consists of 1. Manufacturing segment 2. Services segment 3. Trading segment 66,73,73,612 43,44,23,435 159,83,78,273 The purchases from AEs of Rs.159,83,78,273/- is adopted in making the ALP adjustment towards Trading segment instead of Rs.266,77,45,363/- adopted by the TPO in his order. The Margin camed by Wipro GE Medical Systems is as under Total Sales of Trading Less: Local Purchases & Imports from Non Affiliates Import Non Affiliates/Local Purchase Other local costs - Installation and warranty Costs, accessories, etc., Less: Paid to affiliates as purchase price Rs. 3,198,159,596 271,498,479 540,639,044 1.598.378.274 2.410.515.797 Margin earned 787,643,799 Margin as % of purchase Margin as % of sales 49.28% 24.63% The margin earned by Advanced Micronics Devices Limited is as under (Rupees in Crores) Trading Sales Less: Purchase of traded goods 41.52 33.57 7.95 Margin as % of purchase Margin as % of sales 23.68% ....
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....6 WIPRO GE MEDICAL SYSTEMS PVT LTD - ASST. YEAR: 2012-2013 Particulars Amount (Rs) Amount(Rs) Total Sales of Trading 10,36,32,72,257 Less: Local Purchases & Imports from Non Affilates (NOTE - 1) Less: Import Non Affiliates Local Purchase Sales realisations on affiliates purchases Paid to affiliates as purchase price Other costs Margin earned Margin as % of purchase Margin as % of sales NOTE-1 These purchases are accessories and small items bought & sold as per the requirement of the customers. No profit margin is envisaged on these purchases. as customers themselves can proure these items directly from the suppliers. 35,21,33,186 34,59,81,724 69,81,14,911 9,66,51,57,346 5,41,23,20,773 1,54,05,20,022 6,95,28,40,795 2,71,23,16,551 50.11% 28.06% Document 7 9) R systems International Ltd: ➤Fails the Learned TPO's filter of different financial year end ➤ Functionally different: Dissimilar business activities Having considered submissions, we note that this company failed the different financial year filter adopted by the TPO. We have discussed in detail, upholding the applicab....