TaxTMI 
TaxTMI 
2025 (4) TMI 795
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....he international transactions pertaining to purchase of raw material, research and development (R&D) support services segment and business support services does not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. TPO/Ld. AO has grossly erred in: 2.1. disregarding the arm's length price ('ALP') as determined by the Appellant in the Transfer Pricing (TP) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules'); 2.2. disregarding multiple year/ prior years' data as used by the Appellant in the TP documentation and holding that current year [i.e. Financial Year ('FY) 2006-07] data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; Purchase of raw material 2.3. failing to appreciate that the international transactions of the Appellant relating to import of components for manufacture of electrical equipment would meet the arm's length principle on a transaction-by-transaction basis and disregarded sele....
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.... 4. that on the facts of the case and in law, the Ld. AO has erred in passing the Assessment order dated 30.12.2015 under section 143(3) read with section 144C and 254 of the Act in pursuance to the directions of Hon'ble ITAT (ITA no 5728/Del/2011, order dated 22.11.2012) by not allowing to the Appellant the deduction u/s 10A amounting to Rs 2,85,03,926 and in doing so has gravely erred in: 4.1. Not following the rectified order of Hon'ble ITAT dated 19.02.2015 passed u/s 254(2) of the Act in the Appellant's own case for the Assessment Year 2007-08 wherein Ld. AO has been directed to verify the claim of the Appellant u/s 10A of the Act as per the original return of Income. 4.2. Not appreciating the submission filed by the Appellant on facts and merits of the case, and ignoring the fact that Appellant is eligible to claim deduction under the provisions of section 10A as per form 56F obtained by the appellant and having duly been furnished to Ld. AO/DRP and in fact such claim was duly made in original return though withdrawn in revised return on account of divergent view of the Courts on deduction/exemption under section 10A of the Act. 4....
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.... 3. Import of components 147.36 4. Export of manufacturing goods 28.14 5. Import of capital equipments 1.82 6 Repair and maintenance services(income) 0.14 7. Management support system 10.26 8. Cost contribution arrangement 4.82 9. Royalty 6.80 10. E-content/e-catalogue 11.14 11. Business support services 5.25 12. Research and development support services 45.55 13. Reimbursement of expenses(recoverable) 13.22 14. Reimbursement of expenses(payable) 5.64 2.2. The summary of economic analysis of the impugned international transactions undertaken by the Company during the financial year (FY") 2006- 07 with its associated enterprises ("AEs") has been presented in the table below: Summary of economic analysis in Transfer Pricing ("TP") study S.No. Nature of international transactions Method applied Profit Level Indicator("PLI") Tested party margin Arm's length margin (TP report) 1. Import of components ("Manufacturing import") Transactional Net Margin Method ("TNMM") Operating Profit/Sales ("OP/Sales") 11.70% 10.67% Export of manuf....
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....s against a loss return of INR 13,851,671. The adjustment made in final assessment order has been tabulated below: Total adjustment made by the AO Particulars Adjustment in INR Transfer Pricing Manufacturing segment 596,409,616 Contract R&D service segment 9,150,032 Business support service segment 57,803,317 Corporate tax On account of claim of royalty expenditure on paid basis 68,028,472 Total adjustment 731,391,437 5. In the first round of proceedings before ITAT, the assessee submitted various additional evidences pertaining to its manufacturing segment in order to support the 'transaction by transaction analysis approach' followed by the assessee to determine the ALP of the international transactions pertaining to manufacturing segment. Furthermore, the assessee also submitted its various contentions on the filters applied by the TPO, comparables accepted/rejected by the TPO with respect to Contract R&D services segment and BSS segment, following various jurisprudences. Thereafter, the Co-ordinate Bench of ITAT vide its order dated November 22, 2012 accepted the contention of the assessee and directed the AO/T....
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....stical purposes." 6. Pursuant to the order passed by the ITAT, the AO initiated the second round of assessment proceedings. 7. In the course of assessment proceedings pursuant to ITAT order, the TPO as claimed by the assessee, didn't accept the various evidences produced by the assessee in order to substantiate the 'transaction by transaction' approach followed by it for benchmarking the international transactions with respect to its manufacturing segment. The TPO adjudicated on different issues as follows: Manufacturing segment-The TPO proceeded to reject all the additional evidences submitted before the ITAT to support transaction by transaction approach and its various submissions before the TPO during the remand back proceedings on the basis of his own conjecture and surmises. However, TPO accepted the contention of the assessee to restrict the TP adjustment in respect of its manufacturing segment to the quantum of international transactions entered with the AE and provided proportionate relief to the assessee. Contract R&D support services and BSS segment- In respect of R&D support services segment and BSS segment, the ITAT vide order dated November 22, 2012 (S....
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....egment OP/TC 5 5.02% 18.35% 57,803,317 3. Business Support Services segment OP/TC 6 4.32% 21.84% 9,150,032 Total adjustment in INR 215,353,349 11. The contentions of the assessee before the Tribunal in respect of manufacturing segment is summarized as under:- (i) The TPO/DRP have proposed to benchmark the manufacturing segment of the assessee by aggregating the different sub-segments that the Company operates in. The assessee humbly submits that the manufacturing subsegments ought to be benchmarked independently since they operate under different business models under each sub-segment. (ii) The assessee's detailed contentions with respect to manufacturing segment is as follows:- * Functional difference between manufacturing sub-segments The assessee is operating through different business models in its 4 segments, viz. Manufacturing Import, Manufacturing Export, Manufacturing Local and Manufacturing Hyderabad. The summary of the FAR profiles of the 4 subsegments has been presented under for the Bench's ready reference: Summary of FAR analysis for manufacturing sub-segments of SEIPL Particular....
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....s operating in has been presented hereunder: * License Manufacturing Segment (Manufacturing Import); In this segment, SEIPL produces goods under a licence agreement with its AEs, using manufacturing intangibles owned by the AEs (licensor). Such as patents, product designs, manufacturing process and know-how. Under this segment, SEIPL pays royalties for the use of the licenced intangibles, buys raw materials from its AEs and holds Inventories of the raw materials and finished goods. Therefore, it bears the risks associated with both holding inventories and selling products, including demand and pricing risk. * Contract Manufacturing Segment (Manufacturing Export): In this segment, SEIPL assumes lesner risks than a typical licence manufacturer. The Company produces goods for its AEs and it is the AEs who directly bear demand and final customer pricing risks. In this case, SEIPL, as the contract manufacturer, is compensated by its AEs through a return to enable the Company to earn an arm's length mark-up on total costs incurred in servicing the AEs orders. In addition, if the products made by the Company comply with the AE's product and quality specifications....
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....TP order, TPO has not provided for an adjustment for the differences in the working capital between the assessee and the comparables. However, the DRP in the second round of assessment proceedings directed the TPO to provide the assessee with working capital adjustment. The relevant extract from the DRP's direction is as follows:- "The TPO hall also consider allowing working capital adjustment to the assessee subject to variations in receivables and inventory vis-à-vis the comparables that distort the comparability. Principle wise the adjustment should be allowed if the variations in working capital deployment are established before the TPO." The TPO has however failed to follow the above binding direction of the DRP thereby failed to provide the assessee with working capital adjustment. The assessee's contentions are as follows:- A working capital adjustment analysis seeks to adjust the profitability of each comparable company based on the working capital position of the Company to reflect the differences in working capital investment. Thus, the adjustment tries to isolate the interest effects (taking into account the time value of money) ....
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....antifying the adjustment on account of risk differential in due course of time." 13. The submissions of assessee in respect of Contract R& D and Business support services segments as under:- "At the outset, the assessee submits that the during the first round of appeal proceedings before the ITAT, the Bench set aside the Grounds with respect to inclusion/exclusion of comparables in both segments back to the file of AO/ TPO to decide the matter afresh, vide order dated November 22, 2012. The relevant extract from the order has been provided hereunder for the ITAT's ready reference: "5 (...) We find that in the present case the assessee has also collated supplementary evidence to corroborate the arm's length nature of its international transactions in adherence to the principles and contentions made before the authorities below. We thus in the interest of justice set aside the matter to the file of the AO to first ascertain to his satisfaction that the instances furnished by the assessee by way of supplementary evidence are indeed comparable to the case of the assessee to corroborate the arm's length nature of its international transaction in adherenc....
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.... proceedings, however, the same has not been adjudicated upon during the remand back proceedings. Hence, the assessee humbly submits that the DRP/TPO has failed to provide opportunity of being heard to the assessee. In this regard, the assessee submits that as per the provisions of the Act, an assessment completed without providing an opportunity of being heard, is null and void. The assessee places reliance on the following judicial precedents wherein it has been held that the income-tax proceedings are quasi judicial proceedings and therefore, the AO/TPO is bound to give opportunity of being heard to the assessee. * Indian & Eastern Newspaper Society vs. CIT (1979) (119 ITR 996) * Swadeshi Cotton Mills Co. Ltd. Vs. Union of India, (1981 1 SCC 664) * Collector of Central Excise v. ITC Ltd. (1995-SC) 2 SCC 38 * C.B Gautham vs Union of India and Others (199 ITR 530) (SC) 14. In this backdrop, the broad contentions of the assessee are extracted hereunder:- "that following filters were applied by DRP in the first round of assessment, which were not applied by the TPO:- * Rejection of companies with less than 25% of oper....
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....nies to be accepted pursuant to rejection of export revenue filter S.No. Name of comparable OP/TC 1. Powersoft Global Solutions Ltd. 16.64% 2. V& K Softech Ltd. 5.14% 3. Vama Industries Ltd. (Software development and services segment) 10.99% c. Assessee's contentions against the comparables rejected by the TPO/ DRP The assessee humbly submits that the DRP/ TPO has rejected some comparables on the basis of functional comparability. The contentions of the assessee against the exclusion of such comparables is provided below: Companies to be accepted pursuant to contentions of the assessee on functional similarity S.No. Name of comparable OP/TC Remarks of the Ld.DRP Assessee's contentions 1. ICRA Techno Analytics Ltd. 10.94% Annual Report is available for the FY 2006- 07. It is in the business of IT products and services, Engineering services and KPO. As the company is in to IT services and BPO and in the absence information functionality and segmental details, the company was asked u/s 133(6) to submit the information. As per the information submitted, it appears that most of the revenues fro....
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....evenue earned from training is 4% * Bindview India P. Lad [TS-818- ITAT-2011] * United Health Group Information Services Pvt Lid (TS-255-ITAT- 2014(DEL)-TP) * Systech Integrators India Pvt Ltd (TS-82-ITAT-2014(BANG)-TP] * Prana Studios Pvt Lad (TS-10-ITAT- 2015(Mum)-TP) 2. R Systems International Ltd.- Segmental 10.09% Incorrect margin of 15.07% considered by Hon'ble DRP against correct margin of 10.09% The assessee, without prejudice to the above contentions, would like to propose certain additional companies which are comparable to the assessee, in terms of functions performed, assets employed and risks assumed. Further, these additional comparables clears all the filters applied by the DRP/TPO. Hence, the assessee requests the ITAT to appreciate that since the below mentioned comparables perform similar function to that of the assessee, they should be included in the final set of comparables. S.No. Name of comparable Assessee's contentions 1. SIP Technologies & Exports Ltd. ("SIP Technologies") Functionally similar Engaged in providing software development services. This comparable was also proposed by th....
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....4. S I P Technologies & Exports Ltd. Additional comparable proposed by the Appellant - - 14.12% 10.28% 5. KALS Information Systems Ltd. (Seg.) Final AO order comparable - - - - 6. LGS Global Ltd/Lanco Global Systems Ltd. Final AO order comparable -16.03% 14.30% 16.03% 14.30% 7. Mindtree Limtied Final AO order comparable 16.90% 14.71% 16.90% 14.71% 8. R S Software Ltd. Final AO order comparable 13.48% 13.14% 13.48% 13.14% 9. R Systems International Ltd.- Segmental Final AO order comparable 10.09% 10.09% 10.09% 10.09% 10. ICRA Techno Analystics Ltd. Functionally similar comparable rejected by Ld.DRP during first round of assessment 10.94% 0.78% 10.94% 0.78% 11. Indus Networks Ltd. (Software Services Segment) Functionally similar comparable rejected by Ld.DRP during first round of assessment 2.06% 2.06% 2.06% 2.06% 12. VMF Soft Tech Ltd. Functionally similar comparable rejected by Ld.DRP during first round of assessment 0.15% -55.94% 0.15% -55.94% 13. Powersoft Global Solutions Ltd. Rejected o....
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.... its product offering mix during the year to higher order training programmes with higher margins. Hence, the assessee submits that IL&FS Academy for Insurance & Finance Ltd. ought to be excluded for benchmarking business support services rendered to its AEs. TSR Darashaw Ltd. It reported an OP/TC margin of 33.89% vis-à-vis an OP/TC margin of 15.38% and 14.38% in the prior years i.e. FY 2004-05 and FY 2005-06 respectively. A perusal of the Director's Report of FY 2006-07 indicated that there has been a potential growth in the payroll business of the company resulting in an increase in the income of the company by 40%. Hence, the assessee submits that TSR Darashaw Lad ought to be excluded for benchmarking business support services rendered to its AEs. In this regard, useful reference may be made to the judgment of the Hon'ble Delhi Bench in the case of Sony India (P) Limited [114 ITD 448) in ITA Nos 1189/ Del/2005, 819/ Del/2007 & 820/2007] ("Sony Ruling") (relevant extract reproduced below). "We are also not impressed by the arguments of learned Departmental Representative that Videocon International was included in the list of com....
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....e The assessee, without prejudice to the above contentions, would like to propose certain additional companies which are comparable to the assessee, in terms of functions performed, assets employed and risks assumed. Further, these additional comparables clears all the filters applied by the DRP/ TPO and also has been accepted by TPO in succeeding years. Hence, the assessee requests the ITAT to appreciate that since the below mentioned comparables perform similar function to that of the assessee, they should be included in the final set of comparables. Business support services segment -Additional comparables S.No. Name of comparable Business Description OP/TC Working capital adjusted OP/TC 1. ICRA Management Consulting Services Limited The company is engaged in the consultancy business. It is engaged in the providing multi-line management/development consulting services. This comparable has been accepted by the Ld. TPO himself in the succeeding years i.e. 15.75% 10.54% 2. Rediff.com India Limited The company provides online internet based services focused on Indian and global Indian community. The company provides an interface ....
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.... para 13 and further to the detailed contention provided in para 14, the assessee additionally submits below the summary of comparable-wise contentions for both contract R&D and business support services segment for ready-reference:- S.No. Name of comparable Remarks of the Ld.DRP(First round of proceedings) Appellant's contention before DRP (second round of proceedings) Remarks of the Ld.DRP (second round of proceedings) Appellant's appeal before Hon'ble ITAT 1. Akshay Software Technologies Ltd. Rejected on the basis of onsite revenue filter and functional dissimilarity (please refer page 358 of the paper book) * Onsite Revenue Filter - incorrect filter applied by the DRP. Comparable ought to be accepted after disregarding the filter. (please refer page 106 to 108 of the paper book) * Functional Similarity- having a wholly owned subsidiary in the US(as per the TPO) is not a criteria to reject comparables. Fruther, the company is engaged in providing software development services. * Sale of products -The company only earns 4.35% of its revenue from sale of products. (please refer page 113 to 114 of the paper-book) Upheld the onsite revenu....
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.... the paperbook) Segmental data available-The company has been rejected on an entity level comparison. The Appellant submits that comparability may be restricted to its "software development" segment. Onsite Revenue Filter- 57.254% and is accordingly, clearing the Ld.DRP's./TPO's own onsite revenue filter of onsite revenue/total export revenue. Functional Similarity-Revenue from services consists of revenue earned from services performed for software development & consultancy, sub-licensing fee, web development & hosing, etc. which is recognized as and when services are performed." (Please refer page 117 to 119 of the paperbook). Upheld the onsite revenue filter as a valid filter. (Please refer page 22 of the paperbook) No remarks on the functional comparability of the company The onsite revenue filter is arbitrary and should not be applied for determining the ALP of the company. Considering the same and the functional similarity of the company, it ought to be accepted in the final set. 5. Computech International Ltd. Rejected on the basis of functional dissimilarity (sale of software products) and declining sales (Please refer page 378 to 379 of th....
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....lly similar- The relevant "Software Services" segment has been considered for the purpose of comparability and further as per the snapshot of the annual report, Indus is not engaged in dealing with software products. * Segmental information available The segmentals of the Company are available on Page 38 of the annual report, and the 'software services' segment has been considered for comparability. (please refer page 117 to 118 of the paper book) Not adjudicated upon Company ought to be accepted on the grounds of functional similarity 11. VMF Soft Tech Ltd. Rejected on the basis of functional dissimilarity (please refer page 379 of the paperbook) Functionally similar- The Company has income and corresponding expenses from software development services. Hence the Ld. DRP/TPO's comments are not applicable. (please refer page 120 to 121 of the paperbook) Not adjudicated upon Company ought to be accepted on the grounds of functional similarity 12. LGS Global Ltd. Accepted by DRP (please refer page 379 of the paper book) To be rejected due to super normal growth in revenue and profits (please refer page 96 to 100 of the ....
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.... filters applied by the Ld.DRP. Hence, it ought to be accepted. 16. Datamatics Ltd. NA Functionally similar - Consulting, Information Technology (IT) services Passes filters applied by the Ld. DRP/TPO- -RPT filter; -Export filter; -Persistent losses filter; and -Onsite revenue filter (please refer page 131 to 134 of the paperbook) Not adjudicated upon The company is functionally similar to the Appellant and passes all filters applied by the Ld.DRP. Hence, it ought to be accepted. 17. Qunitgra Solutions Ltd. NA Functionally similar - Engaged in providing software and application development services. Passes filters applied by the Ld. DRP/TPO- -RPT filter; -Export filter; -Persistent losses filter; and -Onsite revenue filter (please refer page 135 to 138 of the paperbook) Not adjudicated upon The company is functionally similar to the Appellant and passes all filters applied by the Ld.DRP. Hence, it ought to be accepted. 18. iGate Global Solutions Limited NA Functionally similar - iGate is an IT company engaged in providing software and application development services Passes filters applied by the Ld. DRP/TPO - ....
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....ect details. (please refer page 155 to 158 of the paperbook) The company is functionally similar to the Appellant and passes all filters applied by the Ld.DRP. Hence, the comparable ought to be accepted. 4. ICRA Management Consutlign Services Ltd. NA * Functionally similar - The company is engaged in consultancy business and providing multi-line management/development consulting services * Accepted as comparable in AY 08-09 and AY 09-10 (please refer page 158 to 160 of the paperbook) Rejected on the basis of functional dissimilarity without providing any cogent reasons (Please refer page 24 of the paper book) 5. Rediff.com India Ltd. NA * Functionally similar - The company provides an interface for global companies to showcase their offerings through its website which offers search engine and facilitation services. * Accepted as comparable in AY 08-09 and AY 09-10 (please refer page 158 to 160 of the paperbook) 17. The Ld.CIT DR for the Revenue, on the other hand, defended final assessment order under challenge and submitted that the final assessment order has been framed in accordance with law after taking due cognizance of....
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....rt); [2] Lumus Technology Heat Transfer BV vs. DCIT (ITA No. 6227/Del/20212), dated 21/2/2014; and [3]. Hinduja Ventures Ltd. Vs ACIT, Mumbai (ITA No. 8866/Mum/2010 dated 02/04/2012). 19. With respect to the deduction claimed under s. 10A, the Ld. Counsel for the assessee contends that in the light of the subsequent order passed by the Tribunal under s. 254(2) of the Act in M.A.No.165/Del/2014 arising in ITA No.5728/Del/2011 order dated 19.02.2015, the claim of deduction under s. 10A ought to have been allowed by the AO and has been wrongfully denied. 20. We have heard the rival submissions and perused the material available on record and referred in the course of hearing. 21. As emerging from records and from the oral and written submissions from the respective sides, the transfer pricing adjustments with reference to manufacturing segment at INR 14,84,00,000/-; Transfer pricing business support service segment at INR 5,78,03,317/-; TP adjustments in contract R&D service segment at INR 91,50,032/- aggregating to INR 21,53,53,349/- is under challenge. The assessee has also inter-alia challenged denial of deduction under s. 10A claimed with reference to th....