TaxTMI 
TaxTMI 
2025 (1) TMI 646
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....tion 92CA(1) of the Act in respect of the international transactions entered by the assessee during the current assessment year. 3. The relevant facts of the case are, the assessee was incorporated on 3RD December, 2010 as a wholly owned subsidiary of Motricity Pte. Ltd., Singapore being part of Motricity Group USA. It was set up as a captive service provider to the group company i.e. Motricity Inc., USA. Motricity India provides software development lifecycle, future product developments, manage served and business analysis services to its Associated Enterprise (AE). A separate Motricity professional services team has also been set up for providing support to customers across Asia and the US. Motricity India have also installed data centre in New Delhi, significant enough to handle expected growth in Indian market. It would be providing full mCore Solution. 4. The assessee entered into service agreement with its AE (USA) with agreed revenue model. Based upon cost plus 20% mark up was agreed upon. The service agreement was entered effectively from 1st January 2011 to 31st December 2011. The effective period covered during the current assessment year is nine months i.e. from 0....
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.....16 9 Lucid Software Ltd. 11.10 10 Mindtree Ltd. 19.19 11 Persistent Systems Ltd. 26.92 12 R S Software India Ltd. 15.43 13 Sankhya Infotech Ltd. 5.68 14 Sasken Communication Technologies Ltd. 14.58 15 Spy Resources Pvt. Ltd. 33.59 16 Tata Elxsi 14.32 17 Thirdware Solution Ltd. (overseas segment) 11.10 18 Zylog System Ltd. 33.01 Average 20.92% 6. Based on the above chart, the TPO has computed the adjustment of arm's length price as under :- Operating cost 28,82,28,110 Arm's Length Margin (%) 20.92 Arm's Length Price (ALP) 34,85,25,431 Price Received 23,86,70,931 Shortfall Being adjustment u/s. 92CA 10,98,54,500 7. Accordingly, he determined the short fall in ALP at Rs. 10,98,54,500/-. 8. A show-cause notice was issued to the assessee and the assessee raised several objections and also objected to the determination of ALP for fourth quarter and on its submission, assessee has submitted as under :- "5. In response to the above-mentioned show cause notice, the assessee submitted its reply vide letter dated 20.01,2016 in which raised ....
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.... paid to employees. It is to be noted that during this period of three months, Motricity India significantly reduced its total workforce from One hundred and Twenty Nine employees in December 2011 to Just Thirty Three employees in January 2012 and further to Twenty Two employees in March 2012. Details of number of employees on month-to month basis are enclosed herewith. All these expenses was incurred for services not provided to AE but are for needed for closure of business. Admin & Other Operating Expenses: The expenses incurred under this head in the non agreement period comprises of balance's w/off, legal fees for closure, rental expenses, accounting fees all needed for maintenance of the company and closure thereafter. Because of termination of contract, Motriciiy India also vacated the office premises before the minimum committed period. So the security amounting to Rs. 2,551,020/- lying with the landlord also got forfeited. Depreciation is a non cash expense and is based on the life of the asset. The assets were not used for the business but as per the terms of Indian Accounting standard, depreciation had to be charged. This is to agai....
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....ts AE for a revenue model of mark-up of 20% on cost w.e.f. 01.01.2011 for a period of one year. It is informed that the appellant company carried on its business for one year and thereafter due to non-suitable business opportunities and other unforeseen circumstances, the service arrangement was not renewed beyond the period of initial one year. 8.3 It is contended that for pre termination of service arrangement i.e. April 2011 to December 2011, total operating cost incurred by the Motricity India for providing services to it AE was Rs. 199,889,205/- on which it charged a margin of 20% and earned a service revenue equal to Rs. 238,670,931/-. It is claimed that expenses of Rs. 190,608,389/- incurred post 31.12.2011 were all related to closure of business of appellant company on which no markup was charged. 8.4 The moot issue here is whether in the facts of the case, the appellant in arm's length conditions, should have charged markup on the costs incurred post termination of service agreement with the AE. 8.5 It is observed that the appellant is a typical captive service provider. It had been set up to provide captive services only to its AEs and not t....
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....ng the order u/s 92CA of the Income Tax Act, 1961 ('the Act') on findings which are erroneous in law, contrary to the facts and based on mere conjectures and surmises; 3. The Hon'ble CIT(A)/Ld. TPO/Ld. AO failed to appreciate the submissions made/ contentions raised by the Appellant and further erred in making several allegations, observations, assertions and inferences in the order, which were both factually incorrect as well as legally untenable; 4. The Hon'ble CIT(A)/Ld. TPO/Ld. AO have erred in not properly appreciating the fact that the assessee company has decided to close down its operations and the service agreement with the AE was terminated w.e.f. 1 January 2012 and accordingly its financial statements are not prepared on going concern basis. 5. The Hon'ble CIT(A)/Ld. TPO/Ld. AO have erred in not properly considering the fact that assessee company has not provided any services to its AE, post the termination of service agreement with them, and the incurrence of expenses post the termination of service agreement was with an object to close down the business of assessee company after 01.01.2012. 6. The Hon'ble CIT(A)/Ld. TPO/Ld. AO have e....
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....ts due to closure, amounting to Rs. 10,19,35,658/- recorded in the value of various plant & machinery deployed by the company as stated hereunder: Assets Impairment Loss Computer Hardware 57,67,194 Furniture &Fixture 3,65,917 Leasehold Improvement 32,28,116 Data Centre Office Equipment 8,93,42,878 Office Equipment 32,32,553 Total 10,19,36,658. 12.1 In this regard, he referred to Profit & Loss Account at page 145 of Appeal Set as well as Note no 9 to Financial Statement at pages 151 / 122. He submitted that in view of this, the account of the assessee was also not drawn on 'GOING CONCERN' basis as duly mentioned in the Auditor's report vide para no 3 of the Auditor's Report and referred to page139 of the appeal set. 12.2 As regards Transfer Pricing Study Report(TPSR) & determination of 'ALP', he submitted that since the international transaction of providing services to its AE were confined to the 9 months period in the impugned year (April to Dec 2011), hence in the TPSR, for the purpose of determination of 'ALP', the relevant cost incurred in the 9 months period ending 31st Dec 2011 were considered and the same was analysed agains....
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....e of business amounting Rs. 8,76,63,710/- and impairment cost of Rs. 10,19,36,658/- was disallowed. He submitted that this is also evident from ITR filed vide Schedule BP - Item No. 15 - Amount of 18,96,00,368 (8,76,63,710 + 10,19,36,658) is disallowed. 12.5 Further he submitted that the ld. TPO did not accept the fact of discontinuation of the service agreement between the assessee and its AE w.e.f 1st Jan 2012 and decided to consider the total operating cost is at Rs. 28,82,28,110/- [ i.e. Total cost of 28,85,60,935 incurred across the 12 months period after reducing interest cost of 3,32,826] and referred to Profit & Loss Account vide page no. 145 of appeal set. In this regard, he submitted that TPO has expressed as under: "The assessee had argued for considering the expense related to post termination of service arrangements i.e. January 2012 to March 2012 as non-operating and thereby OP/OC margin is at arm's length. The reply by the assessee and the documents submitted by the assessee has been perused and analyzed. The assessee has failed to bring out on the record why did it incur expenses after termination of agreement arrangements from January 2012 to March 2012....
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.... close of 25 crores in Indian entity and the Indian entity was also entitled to earn a profit at the rate of 20% of its entire operating cost which would be considered a quite good profit margin by any standard. He submitted that the TP analysis undertaken by the assessee as well as TPO produced the result of ALP close to the margin earned by the assessee. 12.9 Further he submitted that the only point of contention has been that the TPO did not accept a hard business reality in terms of the business decision by the AE of the appellant not to renew the service agreement for the reasons entirely attributable to business propriety and commercial wisdom of the business and which does not warrant any interference from anyone, much less from the tax authority unless they are able to bring on record evidence of any ulterior motive. 12.10 He submitted that the TPO and ld. CIT (A) also failed to realise that the entire loss caused by the disruption of the business would also be entirely suffered by the group only as there is neither any sale of business nor transfer of business entity. Further, he submitted that the cost incurred after 31.12.2011 has been suo moto disallowed in the re....
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....(January 1 to December 31, 2011), following which it became non-operational as the AE did not extend it and further the group, in its wisdom, took decision to wind up the business. He submitted that declaration to such effect was also recorded in the financial statement as well as Auditor's report. Further, he submitted that a valuation of fixed assets was also undertaken since the 'GOING CONCERN' basis was no more applicable and hence an impairment loss of Rs. 10,19,36,658 was also recorded in the financial statements. He further submitted that all these facts were conveniently ignored both by the ld. TPO as well as ld. CIT(A). Thus, he submitted that the decision of TPO to enhance the income by Rs. 10,98,54,500/- was entirely illegal and motivated by baseless assumptions and erroneous findings. In this regard, he brought to our notice Rule 10TA of IT Rules which is as under :- (j) "operating expense" means the costs incurred in the previous year by the assessee in relation to the international transaction during the course of its normal operations including depreciation and amortisation expenses relating to the assets used by the assessee, but not including the following....
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....ecipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account." 12.15 Further he submitted that in the case of Nishith Kumar Mukesh Kumar Mehta vs DCIT (2024)(TS/582/High Court/Madara/2024), the Hon'ble Madras High Court held that while discretionary payments linked to ESOP diminution were taxable due to specific statutory provisions, the court also clarified that notional income cannot be taxed unless explicitly covered by law. Similarly, in the present case, there is no statutory provision supporting the inclusion of expenses for a non-operational period in the ALP calculation. 12.16 He submitted that in the case of Ravi Kumar Sinha vs CIT (TS/590/High Court/2024/Delhi), the jurisdictional High Court (HC) reaffirmed the well-established legal position under the Income Tax Act, stating that tax cannot be levied on notional income. The HC relied on the Supreme Court's judgment in Excel Industries Ltd. to support its stance, emphasizing that the Act....
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....assessee company. 13. On the other hand, ld. DR for the Revenue objected to the submissions of the ld. AR of the assessee and relied on the findings of the TPO and also he brought to our notice findings of the ld. CIT (A) at page 7 of the order. He submitted that the assessee has charged mark-up on service fees but has not charged any mark-up on reimbursement on the ground that the same pertained to the period not covered by the agreement with its AE. He supported the conclusion of the ld. CIT (A) that assessee has claimed expenses of Rs. 19,06,08,389/- incurred after expiry period where all related to closure of the business of the assessee company where no mark-up was charged and also submitted that assessee should have charged mark-up on the cost incurred basis and termination of the service agreement with its AE considering the fact that the unit was established by the group and also decision to terminate the facility also lies only with its AE, therefore, assessee has no role either in set up or closure of the business. Accordingly, he supported the findings of the lower authorities. 14. Considered the rival submissions and the material placed on record. We observed that....
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....n to close down the business taken by the holding company, the assessee has technically declared the actual income and claimed only the actual expenditure incurred for carrying out the international transaction. As far as the expenditures incurred by the assessee during the period of January 2012 to March 2012 which includes the normal business expenditure and also impairment of various assets which were technically claimed by the assessee and further assessee has laid off several employees to give effect to the shut down process. 16. From the actual facts brought on record, we observed that the assessee has actually provided software services only during the period April 2011 to December 2011 and subsequent to that period, it has carried out effectively operations to shut down the business. Therefore, as per the provisions of the Act, the TPO has to determine the ALP of the international transactions carried on by the assessee. In this case, assessee has effectively carried on the international transaction only during period of service agreement. The TPO has to determine only the ALP for such international transactions carried on by the assessee. The TPO selected various compar....