TaxTMI 
TaxTMI 
2024 (9) TMI 1119
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....tion 143(3) read with section 144C of the Income-tax Act, 1961 ("the Act"), is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab-initio. 1.2 That, in framing the impugned assessment order, the reference made by the Ld. AO under section 92CA(1) of the Act suffers from jurisdictional error, as the Ld. AO had not recorded any reasons nor he had any material whatsoever on the basis of which he could even reach a prima- facie opinion, that it was 'necessary or expedient' to refer the matter to the learned Additional Commissioner of Income Tax, Transfer Pricing Officer - 2(3), New Delhi (hereinafter referred to as "Ld. TPO") for computation of arm's length price ("ALP"). 1.3. That on facts and in law, Ld. TPO has erred, by not discharging the statutory onus to establish that the conditions specified in clause (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the ALP determined by the Appellant and proceeded to determine the ALP himself. 1.4. That on the facts of the case and in law, the Ld. AO, has erred in determining the t....
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....n law in relying on the provisions of the Section 92CB of the Act read with Rule 10TA of the Rules for excluding foreign exchange gain from the computation of operating revenue; 2.3.2. That on facts of the case and in law, the Ld. AO/Ld. TPO/ Hon'ble DRP completely failed to apply their minds while relying on Safe Harbor Rules ('SHR') since the SHR are applicable to 'eligible assessee' as defined in Rule 10TB of the Rules in relation to 'eligible international transactions' as defined in Rule 10TC and the Appellant, as part of NMP segment, did not qualify as an eligible assessee' and the international transactions pertaining to the NMP segment did not qualify as 'eligible international transactions'; 2.3.3 That on facts of the case and in law, the Ld. AO/ Ld. TPO/ Hon'ble DRP completely failed to appreciate that SHR are applicable only if an eligible assessee exercises the option to be governed by such provisions for determination of arm's length price of its eligible international transactions and in absence of such option being exercised by the Appellant, the provisions of SHR will have no effect on determination o....
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.... Ld. AO/ Ld. TPO, in particular, erred in selecting Whirlpool of India Limited and Penguin Electronics Limited as comparable companies without appreciating that such companies are not functionally comparable to the NMP segment of the Appellant. 2.5 That on the fact of the case and in law, the Ld. TPO/Ld. AO/ Hon'ble DRP has erred in not allowing a risk adjustment to the Appellant on account of the fact that the Appellant is a limited risk bearing contract manufacturer for its AE and does not undertake market risk, product liability risk, credit and collection risk, inventory and capacity utilization risk as against comparable companies that are the full-fledged risk bearing entrepreneurs. TP adjustment in relation to international transactions pertaining to provision of Contract Software Development ("CSD") services. 3. That on the fact of the case and in law, Ld. AO/ Ld. TPO/Hon'ble DRP have erred, in making an adjustment of INR 10,00,60,000 to the total income of the Appellant in respect of international transaction pertaining to provision of CSD services to its overseas associated enterprise ('AE'). 3.1. That on the fact of the....
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.... to the international transaction pertaining to provision of CSD services on the ground that the said companies have incurred persistent losses without appreciating that the companies were functionally comparable to the CSD segment of the Appellant and that the said companies had operating profits in one out of three financial years. 3.6 That on the fact of the case and in law, the Ld. TPO/Ld. AO/ Hon'ble DRP has erred in not allowing a risk adjustment to the Appellant on account of the fact that the Appellant is a captive service provider for its associated enterprises and is remunerated on a cost-plus basis irrespective of the outcome of the services provided and hence undertakes no market risk, service liability risk, credit and collection risk as against comparable companies that are the full- fledged risk bearing entrepreneurs. Levy of interest under section 234A and 234B of the Act. 4. That on the facts of the case and in law, the Ld. AO has erred in levying interest under section 234A and section 2348 of the Act. The above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute an....
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....nt Segment (CSD). 6. The facts relating to MPA segment and ground nos. 2.1 and 2.2 raised by the assessee for treatment of foreign exchange gain as part of the operating income of the Assessee are, the AO/TPO has not treated the foreign exchange gain transactions as part of the operating income and determined the ALP adjustment accordingly. Even the Ld DRP has sustained the findings of AO/TPO. Aggrieved, the assessee is in appeal before us. 7. At the time of hearing, Ld AR submitted as under: 7.1. At the very outset, it is of seminal importance to highlight that the AO as well as Dispute Resolution Panel ("DRP") committed a blatant mistake by treating the foreign exchange gain as non-operating item, thereby, excluded the same from the operating revenue while computing profit level indicator being Operating Profit/ Operating Cost. Whilst doing so, the reasons provided by the DRP/Transfer Pricing Officer ("TPO") are as follows: a. That in terms of the definitions as provided under clause (j) and (k) of Rule 10TA of the Income Tax Rules, 1962 ("IT Rules") Safe Harbour Rule for International Transactions, the term "operating revenue" does not include any income ....
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....ffirming the reasoning of the ITAT categorically held that since the foreign exchange fluctuation loss suffered by the Assessee directly resulted from the trading activity, the same ought to be considered as operating item as opposed to non-operating item. Reliance in this regard is also placed on PCIT v. B.C. Management Services (P.) Ltd., (2018) 403 ITR 45 (Delhi High Court); PCIT v. Rolls Royce India Pvt. Ltd., [Order dated 23.10.2017 in ITA 419/2016 & 747/2016] (Delhi High Court). 7.5. Further, the coordinate bench of the Tribunal in the case of Convergys India Services (P.) Ltd. v. ACIT. [2022] 134 taxmann.com 15 (Delhi Tribunal), while dealing with the identical argument of foreign exchange fluctuation risk being borne by the foreign AE, specifically opined that foreign exchange fluctuation is an integral part of the sale and purchase transactions and in essence, an integral part of the international transaction entered by the Assessee and thus, in that view of the matter, the same would be treated as an operating item while determining arm's length price under chapter X of the Act. In the instant case, the Appellant was engaged in import of raw materials and exp....
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....Appellant is not assuming the foreign exchange risk as the Appellant is recovering the foreign exchange loss along with a mark up. c. Conversely, in case of foreign exchange gain, the same should be considered as part of operating revenue and should form part of the transfer pricing. This is because in case where the AE assumes the loss arising from the foreign exchange loss, the gain, if any should also be assumed by the AE only. Thus, in case of a foreign exchange gain of say INR 63 and cost base being INR 10,000/- the Appellant will receive only INR 10,100/- as the Appellant has already received part of such remuneration being INR 63, in the form of foreign exchange gain. Thus, in case such foreign exchange gain is not considered as an operating income for the purpose of benchmarking. same will result in foreign exchange risk being assumed by the Appellant which is clearly not the case. 7.9. Hence, on this count as well, the actions of the DRP and AO are untenable in the eyes of law, liable to be quashed. 7.10. Before delving into the specific arguments for inclusions and exclusions of comparable, it is humbly submitted that in case where the foreign e....
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.... decision of jurisdictional high court in the case of PIT v. Nokia Sremene Network India (P) Ltd.. [2019] 111 taxmann.com 445 (Delhi High Court), wherein it was that a comparable cannot be excluded only on the grounds of persistent losses or declining revenue in is functionally comparable to the Assessee. Therefore, on this count as well, Zenith is liable to be included in the final set of comparables whilst determining arm's length price under chapter of the Act. Copy of the said decisions is being enclosed for the sake of ready reference. 9. CONTRACT SOFTWARE DEVELOPMENT SEGMENT With regard to Exclusion of Infobeans Technologies Ltd., Persistent Systems Ltd., Larsen and Toubro Infortech Ltd. and Mindtree Ltd. (Concise Grounds of Appeal-Ground No. 3-3.2) 9.1 Ld AR submitted that he relies on the Chart submitted during the course of hearing on 20.06.2024 and further submitted as under: a. Infobeans Technologies Ltd.: Functionally dissimilar (pg. 14-15 of the AR Compl), No segmental data available: Engaged in high-tech software services (pg. 44 of the AR Compl.) Rely on Avaya India Ltd. v. ACIT, (Order dated 24.09.2019 in ITA No. 7290/Del/2018) (Delhi ....
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....venue Department on the decisions of the Tribunal rendered in the case of TPG Software Pvt. Ltd. v. DCIT, (Order dated 11.09.2023 in ITA No. 6468/Del/2018) (Delhi Tribunal): Steria India Ltd. v. ACIT, [Order dated 28.09.2020 in ITA No. 741/Del/2017) (Delhi Tribunal); Velocity Tech-Sol India Pvt. Ltd. v. ACIT, [Order dated 30.05.2022 in ITA No. 1694/Pun/2018] (Pune Tribunal), is grossly misplaced since all these Assessee/s were performing different high-end functions in the software industry and could not be compared with the Appellant being a captive service provider. The difference being that in the case relied upon by the Revenue Department, the tested parties were engaged in provision of software development services on behalf of its foreign AE's for customers of the foreign AEs, while the Appellant herein is engaged in captive software development services i.e., coding and testing for mobile phone software installed in the mobile phones manufactured and sold by foreign AEs. Further, none of the judgments relied upon by the Revenue Department deal with the previous decisions rendered by the Tribunal and the High Courts and thus, are per incuriam to that extent and cannot be ....
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.... if the foreign exchange gain/loss is not considered as part of operating income/expense, the same would not be considered for the purpose of computing the assured return for the assessee and thus the assessee would bear the risk of such losses. (2) The assessee has claimed that the foreign exchange gain/loss arising from business operations and thus should be treated as operating in nature. Also, the assessee has relied on ICAI guidance note and stated that appropriate adjustment should be made for accounting practice including the adjustment on account of foreign exchange fluctuation to make the accounting treatment consistent and improve comparability. Further the assessee has also relied on some decisions of Hon'ble Tribunal. Department arguments: 11.4. The assessee company is a contract manufacturer of mobile phone and contract software developer to its AE's. Further in the TP study report, it has been clearly mentioned that the entire exchange risk is borne by the AE only and assessee's company is fully insulated for the foreign exchange risk i.e. gain or loss related to foreign exchange. For ready reference, the relevant extract of foreign exchange ris....
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....isk is borne by the AE only. Also on the specific query by the Hon'ble Bench, the assessee counsel could not explain how and on what account, the company suffers the foreign exchange gain or loss because that is fully borne by the AE only. Thus as the assessee does not have any bearing with regard to foreign exchange risk accordingly the assessee does not have any case that foreign exchange gain and loss should be treated as operating in nature. 11.6. In Transfer Pricing, benchmarking is done on transaction by transaction basis. For benchmarking the price/cost incurred/received by assessee company is compared with comparable companies which undertake the similar transaction independently. The foreign exchange gain/risk is usually undertaken at the end of the year and in a way it is not directly related to the transaction price. Also the foreign exchange gain/loss is based on the hedging policy of the foreign companies. For comparing two transactions with regard to foreign exchange risk undertaken by two different companies, there should be the same hedging policy adopted by the two companies. In the case of assessee, first of all, it is not exposed to any foreign exchange ri....
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....lly. 12. From the perusal of the above, it is clear that the DRP has given directions, that similar treatment i.e. foreign exchange fluctuation i.e. gain/loss should be treated as non operating in the comparables companies. Thus, it is crystal clear that the DRP has given directions for benchmarking, the assessee transactions with the comparable companies by treating foreign exchange gain/loss as non operating in both the cases and brought parity with regard to comparable criteria. Thus there is no ground for assessee to complain and allege that before the Hon'ble Tribunal i.e. its cases are dealt differently from comparable companies because after the DRP directions, the TPO/AO has taken only the transactions price and not the associated foreign exchange risk gain/loss for comparing. When this fact was brought before the Hon'ble Tribunal, the assessee counsel could not explain the allegations that different comparison criteria was adopted in case of assessee and other with comparable companies or the prejudice caused with regard to comparison of transaction by transactions when the components of foreign exchange gain/loss in both the cases as well in comparable companie....
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....xpress (India) (P.) Ltd v/s ACIT, ITAT Mumbai Bench 'D' [2011] (11 Taxmann.com 40) Para No. 7 2) Hanil Tube India (P.) Ltd v/s DCIT, ITAT Chennai Bench 'D' [2017] (81 Taxmann.com 69) Para No. 10.2. For ready reference relevant extract is reproduced below- 10.2 We heard the rival submissions and perused the material placed before us. The assessee claimed foreign exchange loss amounting to Rs. 3.06 Cr. which was considered by the TPO as operating income for computing PLI. He did not exclude the same. Out of foreign exchange loss of Rs. 3.06 Cr. an amount of Rs. 1.41 Cr. was on account of reinstatement of balances outstanding at the end of the year. According to the Ld. DR, the foreign exchange loss represents operating income and according to the Ld.AR foreign exchange loss would not give any benefit to the AE and it is the loss on account of foreign exchange fluctuation which is unforeseen expenses by the assessee. Therefore, the foreign exchange loss or gain are to be excluded from the operating income. Foreign exchange loss or gain due to reinstatement of balance outstanding at the end of the year cannot be held as operating profit/loss s....
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....o be taken as functionally similar. It is respectfully submitted that this company is functionally totally different products i.e. manufacturing of computers, laptops and desktops as compared to the assessee company which is in the manufacturing of telephones. Also this company fails the persistence loss filter and on the specific query of the bench the assessee has also conceded that it is making losses for three years including the financial year in question. (ii). Also the assessee stand that if blue star is considered functionally comparable then zenith computers should also be considered functionally comparable does not hold much water as the blue star has been rejected by assessee only by citing the reason that insufficient revenue from comparable product. Thus, as blue star is in cooling product segment the assessee cannot again claim that zenith computers Ltd. should also be treated on the same line as blue star Ltd. Also, with regard to Penguine Electronic Ltd., it is stated that it is the assessee own comparable and the same has not been discussed at DRP level. Even for Whirlpool India Ltd., it is respectfully submitted the assessee has not objected befo....
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....his reason of limited role in software development by the assessee company has not been taken before the lower authorities and assessee can't take any new ground at this stage, as has been observed by Hon'ble bench also in the physical hearings. Further the functional profile of the assessee's company is common and almost identically worded in functional profile as mentioned in TPSR of various other companies including the comparable companies. 3. Reliance was also placed, on the decision of Hon'ble Delhi ITAT in the case of Headstrong Services (India) Pvt. Ltd. Vs. DCIT circle 11(1), 68 Taxmann.com 363(2016), wherein the identical issue or limited role in software development v/s the complete software development services provided by comparable is discussed. For ready reference, the relevant extract reproduced below: 13.2 After considering the rival submissions and perusing the relevant material on record, we find that the total sales of this company for the corresponding year ending is Rs. 38.31 crore. Para 17.2.13 of the Annual Report of this company provides that: 'The company is primarily a services company engaged in technical consulting,....
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....comparables: Based on the above functional profile, the TPO has some companies and the assessee has challenged the inclusion of following companies, which are discussed case by case. (i) Infobeans Technologies Limited The assessee has mentioned the following reasons for exclusion/rejection- 1. Functionally dissimilar:- 2. Further in absence of segmental data the comparable margin cannot be determined. 3. Information memorandum issued by the Company dated March 3, 2015 which contains financial information and business description about the company for FY 2013-14 shows that company has diverse business and is engaged in Custom Application Development ('CAD'), Content management systems, Enterprise mobility and Big Data Analytics. Further the assessee company has stated that the above services significantly differ from the functions performed by the Appellant in the CSD segment. (ii) Persistent Systems Limited The assessee has mention the following reasons for exclusion/rejection- 1. Functionally Dissimilar: Engaged in software products, services and technology innovation including research, engin....
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....chnology consulting, cloud, digital business's, independent testing, infrastructure management services, mobility, product engineering and SAP services. 2. The company follows non-linear revenue models 3. Product company: the company is engaged in providing software delivery platform 4. Owns significant intangibles: Mindtree owns intangible assets in the nature of intelligent property and has applied for several patents. During GY 2013-14, the company filed patent application for Integrated Radio Frequency From End Circuit. 5. Engaged in significant R&D activities: Mindtree was engaged in significant R&D activities. 6. Insufficient segment information: Engaged in diversified business of provision of services and deals in product platforms. However, it has disclosed segmental information pertaining to market/industry segments only. 7. High turnover: Mindtree turnover is more than 25 times of Appellant's turnover from CSD services. (During FY 2013-14, turnover of the Appellant from the CSD segment was INR 115.9 crores and that of Mindtree was INR 3031 crores. 8. Earning Supernormal Profit: Mindtree is earning supe....
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....ent in itself cannot become the only factor for excluding the comparable. Thus, it is submitted that as the assessee has not been able to prove the impact on financials of extraordinary event accordingly, M/s L& T Infotech cannot be excluded. At best, if the Hon'ble Bench deem fit the same can be remitted back to the TPO/DRP for analyzing the impact of extraordinary event. Also the department relied on the Hon'ble Delhi High Court decision in the case of Rampgreen Solutions Pvt. LTd. vs. DCIT (2023) 154 taxmann.com 541 (Delhi Tribunal), wherein the functional similarity was considered as the prime most criteria for judging the comparability of two companies. 3. Reliance is also placed on the decision of Hon'ble I Bench only in the case of TPG Software private Limited Vs. DCIT for A.Y 2014-15 in ITA no. 6468 / DEL / 2018 only has done in depth analysis of financial statements of M/s Mindtree Limited and M/s Persistent Systems Limited for the same A.Y i.e 2014-15 only i.e F.Y 2013-14 and in that case also the assessee company has raised the similar grounds for claiming exclusions of these two comparables with regard to software development services to its AE. For....
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.... Rs. 6.7 crore comes to 0.2% of turnover of Rs. 3031.6 crore However, the assessee also owns intangible of Rs. 6.03 crore including goodwill, which is 13.85% of turnover of Rs. 43.53 crore. Thus this contention of assessee is without any basis and thus based on the above analysis, the assessee company is functionally similar comparable to M/s Mindtree Ltd. Persistent Systems Ltd. Persistent System Ltd. 24. The Revenue held that this is functionally comparable as the companies found to be providing software services. The Id. AR submitted that the company is mainly involved in software product development and development of end to end solutions. The assessee, on the other hand, is engaged in providing software development services and does not develop software products or end to end solutions. The Id. AR submitted that this company is engaged in sale of software products and not software services. The Ld. AR further argued that, 1. Segmental financials are not available, 2. The comparable is involved in R&D activities and has intangibles, 3. The comparable had an extraordinary event namely acquisition of Cloud Squads Inc. 4. High turnover ....
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.... and submitted that they have discussed the functionality of this company in detail and therefore this company is functionally comparable." 17. We have carefully considered the rival contentions and perused the standalone financial statement of the above company placed in the paper book at page number 110-153 (annual report page number 156 198). In its revenue stream as per page no 166 of Standalone Financial statements its revenue recognition shows that:- "Income from software services Revenue from time and material engagements is recognized on time proportion basis as and when the services are rendered in accordance with the terms of the contracts with customers. In case of fixed price contracts, revenue is recognized based on the milestones achieved as specified in the contracts, on proportionate completion basis. Revenue from royalty is recognized in accordance with the terms of the relevant agreements. Revenue from maintenance contracts is re cognized on a pro-rata basis over the period of the contract. Unbilled revenue represents revenue recognized in relation to work done on time and material projects and fixed price projects until the balance shee....
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....ing and has very high turnover, but failed in convincing us the impact of these things on the overall margin of the company. Therefore, we are of the considered view that this company passes all the filters and has been rightly taken in the final set of comparables. No interference is called for. Thus in view of the above, it is absolutely clear that this company is involved in sale of software services only for the same assessment year i.e. A.Y. 2014-15 only, like the assessee company and these are the findings/decisions of Hon'ble Jurisdictional ITAT only, which have a binding precedence. Also, the P&L account shows M/s PSL. has only one stream of income (page 449) i.e. from sale of software services only. 28. The assessee has quoted certain case laws including the decision of the Hon'ble Delhi High Court in the case of Microsoft India Ltd. however the facts of that case were different i.e. M/s Microsoft was found engaged in rendering software development services and ITES. Further the assessment year involved in that case was A.Y. 2011-12 and A.Y. 2012-13 which are different from the present appeal. Also, the other decisions cited are distinguishable and they were ....
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.... turnover cannot be compared with low turnover companies. The decision of the Hon'ble High Court has been perused and it is seen that in that case M/s Vipro Technology was excluded as a comparable on several grounds and the contentions of the assessee are not clearly borne out of the decision of the Hon'ble Delhi High Court, a fact, which has been duly observed by the Hon'ble Bench also. Further, the assessee reliance on DRPS findings for A.Y. 2012-13 with regard to high turnover companies is also not mentioned in the order of the Hon'ble Delhi High court. (v) Intangibles: Further the assessee has alleged that M/s PSL owns intangibles of Rs. 16 crores however if we compare it with sales of Rs. 1184 crores then it is only 1.35% of the turnover which is negligible. It is also not only of place to mention that assessee company has intangible including goodwill of Rs. 6.03 crore against sales of Rs. 43.53 crore, which comes out to 13.85% of turnover. (vi) R & D activity: The assessee has also taken the ground that M/s PSL is involved in Research & Development activity. The details of Research and development expense s by M/s PSL is given on note 35 of ....
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....are and Services India Pvt. Ltd. (IT(TP)A No.- 3375/Bang/2018 CGI Information Systems and management consultants Private Limited vs. ACIT. IT(TP)A No. 586/Bang/2015 Saxo India Pvt. Ltd. vs. ACIT: ITA No. 6148/Del/2015- The Id. AR argued that the companies having significantly higher turnover than the assessee is not a good comparable: PCIT vs. Agnity India Technologies Pvt. Ltd.: ITA 447/2018-(Delhi High Court). Aggressive Digital Systems (P) Ltd. vs. ITO: [2022] 97 ITR-(T) 687 (Delhi Trib.). Nuance Transcription Services India Private Limited vs. ACIT: [IT(TP)A No. 3230/Bang/2018). Deliverhealth Solutions india Pv t. Ltd. vs The AO: [IT(TP)A No. 721/Bang/2021). 32. Having gone through the submissions, we find that the turnover is within the acceptable range, the FAR matching, the segmental information is not required as there is single common segment of revenue and in the absence of financial implication on the occurrence of extraordinary events and having found intangibles being 1.35% as negligible and same with the R&D activities which is 0.3% of the turnover and hence, we hold that Persistent Systems Ltd. can be considered as a right comparable.....
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....e does not own any risk and any exchange fluctuations in the international transactions are borne by the parent company. With the above risk factor on record, in our considered view, when the assessee gets the revenue as per the contract value and all other risks are mitigated by the AE. This can be understood with the following example. Let's say that the assessee gets usd 1000 as the contract price and all the risks are taken care by the AE, then the assessee will get the contract price in India at Rs. 85000/- (ex.rate @ Rs. 85/-). If there is any movement in the currency rates, say moves upward or downward at Rs. 87/- or Rs. 83/-, the difference of Rs. 2000/- is passed on to the AE. Therefore, the assessee are assured to get the contract price at Rs. 85000/-. The exchange fluctuation account is only to monitor the exchange movement and settlement mechanism with the AE and it does not form or impact anyway in the operating revenue or operating expenditure of the assessee. The assessee will be compensated the contract price or invoice value by the AE. Therefore, it can have no place in the financial results of the assessee company. Hence, the operating income/expenses of the asses....
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....al risk of forex with the respective companies/assessees. When the risk is not borne by the assessee as in the present case, it cannot rely on the decision where the relevant risks are borne by the respective companies/assessees. Therefore, in our considered view, the case law relied by the assessee are distinguishable to the facts in the present case. Therefore, this contention of the assessee also rejected. Accordingly, the relevant grounds raised by the assessee are dismissed. 36. Coming to the final comparables selected by the TPO in the MPA segment, we observed that the TPO has rejected the Zenith Computers Limited (ZCL) as comparable with the assessee company and assessee prayed that this comparable should be included as it is functionally similar to the assessee company. On careful verification of the facts on record, the TPO has applied filter to eliminate persistent loss making companies as one of the criteria and accordingly, it was observed that this company was making persistent loss in the last three years including current assessment year. The assessee has highlighted that the ZCL has incurred losses in FY 2012-13, 2013-14 and earned profit in FY 2011-12. Therefore....
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....ore us that it is functionally dissimilar, no segmental data were made available and it is involved in the high tech software services. On the other hand, Ld DR submitted that the profile of the assessee company clearly demonstrate that it is involved in the entire spectrum of software development from planning to ultimate testing and integration of the module developed for the AE. The entire process of software development is done by the assessee and the ownership and conceptualization may be done by its AE. This issue was not taken at lower level, raising at this level is objectionable. After considering the facts on record, we are of the view that no doubt the functions performed by the assessee in developing the software is similar to any comparable companies but the concept and ownership are also plays major role in the determining the price and risk involved. The comparables selected by the TPO should also match the same profiles for comparison. In this case, the assessee is only a contract software developer and it does not have any risk factor and also conceptualization and ownership is always with its AE. The selection of comparables has to be on same page, if required cer....
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....rvices, deployment services. Further, it incurs significant R&D expenditure which has resulted in significant intangibles. It also not made available segmental informations. As per the annual report of the company, it does not maintain segment information in relation to its product and service segment separately. It reported only the market segments and not based on various product and services it caters to. Further it owns significant intangibles. On the other hand, Ld DR objected to the above submissions. After considering the both submissions, we observe that the assessee is only contract software developer, the development risk and ownership risk is not with the assessee. We observe that in the case of Avaya India Pvt. Ltd. and Alcatel Lucent India Ltd are held as under: "8.3 We have heard the rival submission of the parties. On page 290 of the paper-book, in the notes forming part of the financial restatement of the company, under the head segmental information, it is mentioned that the company operates predominantly for providing software products, services and technology innovation covering full life-cycle of products to its customers. The segemental information, ho....
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.... inclined to direct the AO to delete the above comparables from the final list of comparables. c. Larsen and Toubro Infotech: It is engaged in product engineering services whereas the assessee is engaged in CSD segment. Further, the L&T Infotech has disclosed insufficient segmental data and more importantly there is demerger of product engineering services business and it had impacted profit entity level. The Hon'ble Delhi High Court had held that it is not valid comparable on account of extraordinary events. On the other hand, Ld DR objected to the above submissions. We observed that in the case of Global Logic India Ltd (supra), the coordinate bench held as under: "6.8 During the year, the extraordinary event of demerger of product engineering service business (PES) has occurred with effect from 01/01/2014, which has also impacted the profit of the company at the entity level. In the decision of the Tribunal in case of Xchanging Technology Service India Private Limited (ITA No.1897/Del./2004), which has been approved the Hon'ble High Court in ITA No. 813/2015, the company is held to be not valid comparable on account of extraordinary events. Thus, In view of....
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....ny has to enter the domain of DTAA, the countries should have agreed specifically in the DTAA to that effect. In the Treaty between India and Hungary, the Contracting States have extended the Treaty protection to the dividend distribution tax. It has been specifically provided in the protocol to the Indo Hungarian Tax Treaty that, when the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend. While making Reference in the case of Total Oil (supra), the ld. Division Bench has made the following observations on this aspect: "(f) Wherever the Contracting States to a tax treaty intended to extend the treaty protection to the dividend distribution tax, it has been so specifically provided in the tax treaty itself. For example, in India Hungry Double Taxation Avoidance Agreement [(2005) 274 ITR (Stat) 74; Indo Hungarian tax treaty, in short], it is specifically provided, In the protocol to the Indo Hungarian tax treaty it is specifically stated that "When the company paying the dividends is a resident of India the tax on d....
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....iability in India, such taxation in India, in our considered view, cannot be protected or influenced by a tax treaty provision, unless a specific provision exists in the related tax treaty enabling extension of the treaty protection. (h) Taxation is a sovereign power of the State- collection and imposition of taxes are sovereign functions. Double Taxation Avoidance Agreement is in the nature of self-imposed limitations of a State's inherent right to tax, and these DTAAs divide tax sources, taxable objects amongst themselves. Inherent in the self-imposed restrictions imposed by the DTAA is the fact that outside of the limitations imposed by the DTAA, the State is free to levy taxes as per its own policy choices. The dividend distribution tax, not being a tax paid by or on behalf of a resident of treaty partner jurisdiction, cannot thus be curtailed by a tax treaty provision." 82. We are of the view that the above exposition of law is correct and we agree with the same. Therefore, the DTAA does not get triggered at all when a domestic company pays DDT u/s. 115O of the Act. CONCLUSION: 83. For the reasons give above, we hold that where dividend is d....