TaxTMI 
TaxTMI 
2023 (2) TMI 1461
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....erred in determining the total taxable income of the Appellant for AY 2011-12 at Rs.4,53,58,45,730 instead of the amount of Rs 1,29,87,11,835 as reported in the Return of Income filed by the Appellant A. Transfer Pricing Grounds Reference to Transfer Pricing Officer (TPO') 2. erred in making a reference of the Appellant' s case to the Learned TPO, which is not in accordance with Section 92CA, and then makinga transfer pricing adjustment of Rs.3,23,60,70,3 74 to the total income of the Appellant for AY 2011-12; Use of single year data 3. erred in law and in facts in rejecting the mechanism adopted by the Appellant for benchmarking its international transaction of provision of software development services using three year weighted average data of comparables; and determining the arm's length operating margin for such services using the operating margins earned by the companies for only financial year ('FY) 2010-11; Criteria/filter adopted by the TPO while selecting/rejecting comparable companies 4. erred in applying a filter of rejecting companies which followed a financial year other than April to March;....
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....ssets; Risk Adjustment 3. erred in not allowing the benefit of any adjustment to account for the difference between the functions undertaken, assets employed or risk profile of the Appellant and of the comparable companies; 14. erred in not granting the Appellant the benefit of risk adjustments which is required to be undertaken to account for the differences in level of risks assumed between the comparable companies and the Appellant in terms of Rule 10C(2)(e) of the Rules; Working Capital adjustment 15. erred in not granting the benefit of working capital adjustment to account for the difference in working capital levels between the Appellant and the comparable companies; Application of arm's length range 6. The learned TPO has erred, in law and facts, by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the proviso to Section 92C of the Act; Adjustment in respect of recovery of out of pocket expenses 7. erred in levying a mark-up of 12% on the out of poc....
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.... made a reference u/s.92CA(1) of the Act to the TPO dated 28.11.2013 for computation of arms length price in relation to the international transaction evidenced in the audit report. The TPO vide order dated 22.01.2015 passed u/s.92CA(3) made transfer pricing adjustment of Rs.323,60,70,374/-, pertaining to the international transactions entered into by the assessee company for software development and for recovery of out-of-pocket expenses. Pursuant to this, the AO made an addition of the impugned amount to the total income of the assessee, confirming the arms length price determined by the TPO. The assessee challenged the additions made by the AO/TPO by way of objections before the ld.DRP and based on the directions given by the ld. DRP, an upward adjustment of Rs.323,60,70,374/- was made to the total income of the assessee, consequent to the rejection of objection filed by the assessee before the ld.DRP. 8. The assessee has raised about 20 grounds of appeals, including corporate and non- corporate tax grounds. The learned Authorised Representative (ld. AR for short) for the assessee submitted that out of the ground raised by the assessee, ground No. 1, 6 and 9 were being genera....
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....redetermined consideration. The assessee further contends that these two enterprises are deemed to be AE's, where the goods or articles which are manufactured or processed by one enterprise are sold to other enterprises or to persons specified by other enterprise and the price and other conditions are influenced by such other enterprises. For this, the assessee relies on the provisions of section 92A(2)(i). This contention of the assessee was rejected by the lower authorities on the ground that the assessee company was offering services to more than one company and that the assessee has not proved by any documentary evidence that such enterprises was influencing the price or other conditions of the assessee and also for the reason that the takeover of the company by another company does not mean that the associated enterprises of the erstwhile company will continue to be AE for the successor company subsequent to the merger. The assessee's contention that the said comparable had earned margin of 54.42% on cost was exorbitantly high, was also not considered by the lower authorities for the reason that the assessee has not proved the factors which was responsible for higher p....
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....and also perused the relevant findings given in the impugned order as well as the material placed on record before us. Wipro Ltd., had acquired a company known as Citi Technology Services Ltd., in the year 2009 as a part of overall business deal, which was carrying out the services for Citi Group, which then were related party transactions. Wipro Ltd. signed a Master Service Agreement with the Citi Group for the delivery of same service for a period of six years with guaranteed revenue of US $500 million. Wipro Technology Services Ltd., has been providing services to Citi Group out of India as a part of said agreement and thereby it falls within the deeming ambit of Section 92B(2), whereby it has to be treated as deemed AE as the service agreement earlier entered was between the related party and same terms and agreement is continuing, hence has to be reckoned in the category of related party transactions. Clause (2) of Section 92B envisages that, a transaction entered into purpose of subsection (1), be deemed to be an international transaction entered into between two AE, if there exists a the relevant transaction prior agreement in relation to the relevant transaction between the....
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....ducts, which is not the case of the assessee. It is observed that the TPO has rejected the contention of the assessee that the comparable has a significant brand value in the market and has incurred expenditure towards brand building by way of marketing expenses. The assessee contended that the brand 'Infosys' has a prominent intangible asset, which influenced the earning capacity of the said company. The assessee further stated that not only did the company holds significant intangibles, it had also incurred substantial expenditure on research and development, owned numerous patents and was one of the pioneer in software development. The assessee further stated that the assessee company had not incurred R & D expenses, and did not own any intangibles and that the assessee was a risk mitigated capital service provider. The assessee made the following comparison between the assessee and Infosys Ltd .: Particulars Infosys Limited CG India Operating Revenues Rs. 25,385 crores Rs. 3,608 crores Operating Profites Rs. 8,821 crores Rs. 423 crores Head count 1,30,820 Employees 1,10,000 Employees (Approx.) Net block of assests Rs.4,056 crore....
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.... valuation of Infosys Ltd., wherein it had specified that the brand related profits for the impugned year was Rs.6717 crores. The ld. AR further stated that that the TPO had specified in his order that for A.Y. 2007-08, the tribunal in assessee's case has held that the concept of economy of scale was relevant only to manufacturing concern and not to service oriented companies was subsequently reversed by the tribunal's decision in subsequent decision. The ld. AR relied on the tribunal's decision in assessee's case for A. Y. 2008-09 and also the decision of the M/s. Fiserv India Pvt. Ltd. vs. ACIT (in ITA No. 700/Delhi/2016 for A. Y. 2011-12 vide order dated 31.08.2020). The ld. DR on the other hand controverted the same and relied on the orders of the lower authorities. 17. We have heard the rival submissions and perused the materials on record. From the above observation, it is evident that there is substantial difference in the financials of the assessee company and Infosys Ltd. The ld. TPO has rejected the contentions of the assessee and has held that Infoys Ltd. was to be included as one of the comparables of the assessee. It is also evident that on identical....
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....ITA No.3856/Del/2010, a coordinate Bench has held as under :- "It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the latter is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited Currency risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded" 11.5 The aforesaid order was upheld by the Hon'ble Delhi High Court after taking note of the chart as given below: Basic Particular Infosys Technologies Ltd. Assessee Risk Profile Operate as full-fledged risk taking entrepreneurs Operate at minimal risks as the 100 percent services are provided to AEs Nature of services Diversified-consulting, application design, development, reengineering and maintenance system integr....
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.... not carry out. It is also submitted that besides this, the other distinguishing factor vis-a-vis that M/s Infosys Ltd. is that concern also owns brand intangibles- an advantage which the assessee does not possess. Lastly, the assessee is captive as opposed to status of M/s Infosys Ltd. With respect to M/s Persistent Technologies, it is pointed out that in a previous order in ITA No. 279/2016 dated 04.05.2016 (Principle Commissioner of Income Tax vs. M/s Cashedge India Pvt. Ltd) held that having regard to the rules i.e. Rule 10B to 10E of Income Tax Rules, the data of M/s Persistent Systems Ltd- could not have been included. Here, it is urged that the assessee is also a member of the Cashedge India group and is engaged in same and identical business. The AY also coincides with that of assessee i.e. AY 2010-2011. For these reasons, we are of the opinion that no substantial question of law arises on the first issue urged." 10.5 We find that the Tribunal has rejected the company mainly on the ground of giant company vis-à-vis the assessee being a captive service provide. Since this ground of the rejection is valid in the year under consideration also, respectf....
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....working capital adjustment. 20. The ld. DR relied on the order of the lower authorities. 21. Having heard the rival submissions and perused the materials on record. It is observed from the submission of the assessee that in assessee's own case for earlier and in subsequent years, the assessee has been given the benefit of working capital adjustment. The Tribunal in assessee's case for A. Y. 2009-10 has held that working capital adjustments are essential for the reason that it has a bearing on the profitability of the assessee company. The lower authorities have not specifically given a finding as to why working capital and risk adjustment cannot be granted merely for the reason that the difference should be material in nature and cannot be granted automatically when there is difference. It has failed to substantiate its view. On the other hand, it is evident that the Tribunal in assessee's case has given the claim for working capital adjustment. We do not find any justification to deviate from the reasons taken by the tribunal in earlier years in granting the benefit of working capital adjustment. Hence, this ground of appeal raised by the assessee is allowed. ....
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....ying the most appropriate method. 24. We have heard the rival submissions and perused the materials on record. It is observed that the AO/TPO has relied on the master service agreement of the assessee with its AE's which it has specified that as per Article 2, the total amount of cost shall exclude those cost incurred on projects performed by the assessee company directly for its clients outside the Capgemini group. The TPO held that the impugned expenses are part of the cost base and worked out markup at 12%. The assessee's contention that only the expenses incurred in the course of provision of services 'which are used' are eligible for markup was not considered by the lower authorities. The assessee's further contention that only other services which are passed on by the group companies in the original form can be considered as pass through costs entitled to be recovered without any markup, was also not considered. The TPO has relied on the guidelines issued by HM Revenue & Customs of UK and held that employee related expenses cannot be treated as pass through costs and has to be considered in the cost base. The ld.AO/TPO worked out markup at 12% by reject....
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....o the main objects and activities of the assessee's business." 2. Whether on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in directing the AO to delete the disallowance u/s 14A though there are investments income from which does not or shall not form part of total income. 3. Whether on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in directing the AO to treat the Government Grant receipts as capital in nature. 28. Ground No. 1 pertains to the allowability of telecommunication expenses such as data line cost, insurance and foreign currency expenditure from export turnover while computing the deduction u/s. 10A which according to the assessee are attributable to the delivery of the computer software. It is observed that the A.O. has disallowed the telecommunication expenditure, i.e., data line cost, aggregating to Rs.9,03,12,991/- from the export turnover of the units eligible for deduction u/s. 10A while computing the deduction u/s.10A in respect of each of the eligible units. The assessee contended that the said expenses has not been charged separately from the clients and, therefore....