TaxTMI 
TaxTMI 
2026 (8) TMI 277
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted 28.10.2023. Facts of the Case 2. Briefly stated, the assessee filed its return of income for Assessment Year 2021-22 on 14.03.2022 declaring total income of Rs. 29,12,86,816/- under the normal provisions of the Act and book profit of Rs. 54,37,16,690/- under section 115JB of the Act. The case was selected for complete scrutiny under CASS on the issue of "international related party transactions in services". The assessee is stated to be engaged in the business of sale of software licences and providing related information technology services to its clients primarily in the United States. It is further recorded in the assessment order that the assessee merged with Indus Infotech Private Limited, PAN AADCK5814C, with effect from 01.10.2020 pursuant to the order of the NCLT dated 18.10.2022, and the name of the merged entity was changed to Indus Valley Partners (India) Private Limited. 3. Since the case involved international transactions with associated enterprises, a reference was made under section 92CA(1) of the Act for determination of the arm's length price. In the draft assessment order, the Assessing Officer proposed variation in respect of transfer pricing issue ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urned income of INR 86,298,740 filed under section 170A for the period of 01-April-2020 to 30-September-2020 pursuant to the merger with Indus Infotech Private Limited with effect from 01-October-2020. 2. Erroneous consideration of transfer pricing adjustment in computing book profits under MAT 2.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in assessing the book profits of the Appellant at INR 1,279,721,971 under MAT provisions of the Act, in pursuance to the directions issued by the Ld. DRP, after considering the original returned book profits of INR 543,716,690, as against the modified returned income of INR 1,13,368,895 filed under section 170A for the period of 01-April-2020 to 30-September-2020 pursuant to the merger with Indus Infotech Private Limited with effect from 01-October-2020. 2.2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in assessing the book profits under MAT provisions of the Appellant at an amount of INR 1,27,97,21,971 which is in excess by INR 74,67,436 even when the transfer pricing adjustment of INR 728,537,845 is added to the original returned book profits....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Ld. AO/ TPO/DRP have erred by arbitrarily rejecting the economic/ benchmarking analysis and methodology adopted by the Appellant in its Transfer Pricing documentation ("TP documentation), being Transactional Net Margin Method ("TNMM") as the most appropriate method ("MAM") using the transactional approach, for benchmarking its international transaction pertaining to availing of intra-group services. 3.7. That on the facts and circumstances of the case and in law, the Ld. AO/ TPO/DRP have erred in rejecting the service provider i.e. AE as the tested party and the mark-up earned by the AE, ignoring the fact that the AE, being the service provider and the least complex entity, was rightly adopted as the tested party. 3.8. That on the facts and circumstances of the case and in law and without prejudice to the other contentions of the Appellant, the Ld. AO/ TPO/DRP has erred in proposing duplicative adjustment by on one hand determining the arm's length price of international transactions pertaining to availing of intra-group services at NIL, and on the other hand proposing an adjustment w.r.t. international transaction of sale of software and provision of services by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fitability of the Appellant. 4.6. That on the facts and circumstances of the case and in law and without prejudice to the other contentions of the Appellant, the Ld. AO/TPO/DRP has erred by rejecting the fresh search of comparables engaged in provision of software development services submitted by the Appellant during the assessment proceedings, even though the comparables are functionally comparable to the Appellant and clears all the filters acceptable to the Appellant on various erroneous grounds. 4.7. That on the facts and circumstances of the case and in law and without prejudice to the other contentions of the Appellant, the Ld. AO/TPO/DRP has erred in denying the economic adjustment for differences in working capital position of the Appellant vis-à-vis comparable companies submitted by the Appellant. Further, the Ld. AO/TPO/DRP erred in denying economic adjustment to operating profit margin of the Appellant without any justification and valid basis. Specific Grounds w.r.t international transaction pertaining to sale of software 4.8. That on the facts and circumstances of the case and in law and without prejudice to the other content....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Limited 5. Erroneous computation of tax liability 5.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in making an ad-hoc adjustment of INR 4,672,091 while computing total tax liability of the Appellant in the tax computation annexed to the final assessment order without drawing any adverse inference in this regard. 6. Levy of interest u/s 234A, 234B and 234C of the Act 6.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in levying interest under sections 234A, 234B and 234C of the Act. 7. Incorrect levy of penalty u/s 270A of the Act 7.1. That on the facts and circumstances of the case, the Ld. AO has erred both in facts and in law in initiating penalty proceedings under section 270A of the Act. Each of the above grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant prays for leave to add, alter, vary, omit, substitute, or amend the above grounds of appeal, at any time before, or at, the time of hearing of the appeal. 7. Since the grounds are issue-specific, we proceed to de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ficer. The learned AR, therefore, submitted that the Assessing Officer ought to have considered the modified return filed under section 170A of the Act while framing the final assessment, and prayed that appropriate directions may be issued for re-computation of income on the basis of such modified return. 11. The learned Departmental Representative (DR) relied upon the orders of the Assessing Officer and the learned DRP. 12. We have considered the matter. Section 170A of the Act specifically deals with the effect of an order of a Tribunal, Court or Adjudicating Authority in respect of business reorganisation. The provision enables filing of a modified return by the successor within the prescribed period, where a return under section 139 has already been furnished prior to the order of business reorganisation. The statutory scheme, therefore, contemplates that once a valid modified return is filed in consequence of an order approving business reorganisation, such modified return has to be considered in accordance with law and subject to the limits of the order approving such business reorganisation. The official text of section 170A records that the successor shall furnish su....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and other adjustments as may finally survive in this order. Needless to say, the Assessing Officer shall afford reasonable opportunity of being heard to the assessee and shall pass a speaking order on this limited aspect. 16. Ground No. 1 is, accordingly, allowed for statistical purposes. Ground No. 2: Erroneous consideration of transfer pricing adjustment in computing book profits under MAT 17. The learned AR submitted that Ground No. 2 is partly consequential to Ground No. 1, since the assessee's modified return filed under section 170A of the Act has not been considered while computing book profit under section 115JB of the Act. It was submitted that pursuant to the merger with Indus Infotech Private Limited with effect from 01.10.2020, approved by the NCLT vide order dated 18.10.2022, the assessee filed modified return under section 170A on 30.04.2023 for the period 01.04.2020 to 30.09.2020. In the said modified return, the assessee declared income of Rs. 8,62,98,740/- under the normal provisions and book profit of Rs. 11,33,68,895/- under MAT provisions, whereas the Assessing Officer proceeded on the basis of the original returned book profit of Rs. 54,37,16,690/-. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....return filed under section 170A of the Act pursuant to the NCLT-approved merger. The assessee has stated that in the modified return filed on 30.04.2023 for the period 01.04.2020 to 30.09.2020, book profit under MAT provisions was declared at Rs. 11,33,68,895/-, whereas the Assessing Officer proceeded with the original returned book profit of Rs. 54,37,16,690/-. Since this aspect is consequential to our adjudication of Ground No. 1, the Assessing Officer shall recompute the book profit under section 115JB after first verifying and giving effect to the modified return filed under section 170A, in accordance with the directions given while disposing of Ground No. 1. The assessee's claim before the DRP on the modified return and book profit under MAT is recorded in the DRP directions. 23. In so far as the second limb of the ground is concerned, the assessee has objected to inclusion of transfer pricing adjustment while computing book profit under section 115JB. The learned AR placed reliance on the decision of the Co-ordinate Bench in Innovative Textiles Limited vs. DCIT. In the said decision, the Co-ordinate Bench considered a similar issue where the Assessing Officer had made tra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly, this ground of the appeal raised by the assessee is allowed and the AO is directed to exclude the transfer pricing adjustment, if such adjustment survives, from the book profits computed under section 115JB of the Act." 27. Respectfully following the aforesaid decision and the ratio laid down by the Hon'ble Supreme Court in Apollo Tyres Limited, we hold that transfer pricing adjustment made under the normal provisions of the Act cannot, by itself, be added while computing book profit under section 115JB, unless such adjustment falls within the specific additions provided in Explanation 1 to section 115JB. The Revenue has not pointed out any clause of Explanation 1 to section 115JB under which the transfer pricing adjustment can be added to the book profit. There is also no finding that the profit and loss account was not prepared in accordance with the applicable provisions of the Companies Act or that the accounts were not duly certified. 28. Accordingly, the Assessing Officer is directed to exclude the transfer pricing adjustment of Rs. 72,85,37,845/-, if it survives under the normal provisions, from the computation of book profit under section 115JB. The Assessing Offi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ustomers, provides onsite support, maintains customer relationships and generates business leads due to its proximity to customers in the US. 33. The learned AR explained that the international transactions under consideration arise from the integrated business model of the group. Where the contract is entered into between the customer and IVP US for sale of software and provision of related services, IVP India provides software development, software sale and related support services to IVP US, and IVP US interfaces with and services the end customers in the US. Conversely, where IVP India directly contracts with customers based outside the US/UK, IVP India avails marketing support, onsite support, managed services and IT consulting support from IVP US, since IVP India's employees are based in India and do not have onsite presence in the US. 34. It was submitted that, considering the close linkage between the transactions and the integrated nature of the business model, the assessee had adopted an aggregation approach and benchmarked the transactions by applying TNMM as the most appropriate method. IVP US was selected as the tested party, as it was the least complex entity in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ons of the learned DRP. It was submitted that the assessee's contention regarding acceptance of its method in earlier or subsequent years cannot be determinative for the year under consideration, since each assessment year is a separate unit of assessment and the arm's length price is required to be determined with reference to the facts, documents, comparables and evidences relevant for the concerned year. 39. The learned DR submitted that the TPO has examined the benchmarking undertaken by the assessee for the year under consideration and has recorded specific defects in the approach adopted by the assessee. Referring to para 6.1 of the TPO"s order, the learned DR submitted that the assessee had used TNMM and selected the foreign AE as the tested party for benchmarking various transactions, namely sale of software to IVP Corp, availing of marketing support services from IVP Corp, availing of support/managed/IT consulting services from IVP Corp, provision of support/IT consulting services to IVP Corp and provision of managed services to IVP Corp. However, the TPO found that where a foreign AE is selected as the tested party, the data of all the companies considered for the sear....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mental results of the AE in Annexure 5 to its reply dated 03.10.2023, but such results were not audited and, therefore, their authenticity could not be relied upon. The learned DR also referred to para 1.4, wherein the TPO observed that the TPSR mentioned that IVP Corp purchased software from India which was further resold to third parties in the USA, and therefore, back-to-back invoices showing the margins earned by IVP Corp should have been furnished. However, the same were not provided by the assessee. 44. It was submitted that in view of the above deficiencies, the TPO invoked section 92C(3)(a) of the Act and held that the prices charged in the international transactions were not determined in accordance with sub-sections (1) and (2) of section 92C. The learned DR submitted that the TPO was, therefore, justified in rejecting the benchmarking based on foreign AE as the tested party and in determining the ALP on the basis of information available on record. 45. The learned DR also referred to para 1.6 of the show-cause notice, wherein the TPO proposed benchmarking by selecting the assessee as the tested party, since reliable data of the assessee was available. It was submit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... order, has brought out that the revenue of the assessee during the year had declined by 6%, from Rs. 2351 million in the immediately preceding financial year to Rs. 2218 million in the present year. As against such decline in revenue, the operating cost had increased by 41%, from Rs. 1408 million to Rs. 1981 million. The learned DR submitted that the break-up of operating cost revealed abnormal increase in expenditure under two heads, namely, delivery support services, which increased by 78% from Rs. 437.7 million to Rs. 779 million, and selling and marketing expenses, which increased by 144% from Rs. 126.39 million to Rs. 307.6 million. 49. It was submitted that the combined increase under the above two heads was Rs. 522.3 million, i.e. Rs. 52.23 crores/-, and that 93% of such increase was attributable to the intra-group services availed by the assessee from its associated enterprises. The learned DR therefore submitted that even if the TPO had accepted aggregation of expenditure in other assessment years, such acceptance would not fetter the TPO from rejecting aggregation in the present year, particularly when there was abnormal increase in expenditure on intra-group services....
X X X X Extracts X X X X
X X X X Extracts X X X X
....idence. It was argued that the emails relied upon by the assessee did not establish that any services were rendered by the AE to the assessee, nor did they establish any economic or commercial benefit to the assessee. The abnormal increase in delivery service expenditure, according to the learned DR, further supported the TPO"s conclusion. 54. In conclusion, the learned DR submitted that the intra-group service transactions were correctly de-segregated and benchmarked separately, as the facts of the year under consideration were materially different from other years. It was further submitted that the assessee failed to establish the need, actual rendition and benefit of the services claimed to have been received from the AE. The evidences relied upon by the assessee showed that the alleged services were rendered by the assessee's own employees/director and not by the foreign AE. Therefore, the TPO was justified in benchmarking the intra-group service transactions at NIL. The learned DR accordingly prayed that the transfer pricing adjustment made by the TPO and sustained by the DRP be upheld and the grounds raised by the assessee be dismissed. 55. The learned AR, in rejoinder,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d marketing support services availed from IVP US for sale of software are intrinsically linked. Therefore, the assessee benchmarked these transactions on an aggregation basis by applying TNMM as the most appropriate method. It was submitted that the TPO was not justified in segregating the marketing support services from the sale of software transaction and determining the arm's length price of the marketing support services at Nil. 59. The learned AR further submitted that during the transfer pricing assessment proceedings, the TPO had specifically called upon the assessee to justify why the benchmarking of sale of software to IVP US and marketing support services availed from IVP US should not be rejected and why the arm's length price of payment for marketing support services should not be taken at Nil by applying Other Method. In response, the assessee furnished detailed submissions dated 03.10.2023, which are placed at pages 520 to 521 of the paper book. Thus, according to the learned AR, the assessee had explained the linkage of transactions and the basis of aggregation during the assessment proceedings itself. 60. The learned AR also submitted that the aggregation appr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... availed from the AE at Nil merely on the ground that the assessee did not satisfy the need-benefit test. It was submitted that such approach is contrary to law and facts, as the assessee had placed on record substantial evidence to demonstrate that marketing support services were actually availed from IVP US and were integrally connected with sale of software. 64. The learned AR submitted that the assessee had filed the following documentary evidence before the TPO/DRP to substantiate availing of marketing support services from IVP US: 65. First, the assessee furnished email communications between IVP US and customers of IVP India, placed at pages 802 to 808 of the paper book. It was submitted that these emails substantiate the efforts made by IVP US personnel in generating leads, procuring customers and maintaining customer relationships for the assessee. 66. Secondly, the assessee furnished recorded sessions of webinars/seminars conducted by IVP US for potential customers of IVP India, wherein promotional material was showcased. These recorded sessions were submitted before the TPO/DRP through compact disk and were referred to at page 1410 of the paper book. It was subm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....service or whether the assessee benefited from such service. Reference was made to paragraphs 34 and 35 of the said decision. It was submitted that the TPO cannot sit in judgment over the commercial expediency of the assessee or determine the ALP at Nil merely because, in his opinion, the assessee did not derive benefit in a particular manner. 72. It was further submitted that even otherwise, the marketing services were availed from the AE at arm's length. Had the assessee availed such services from any other independent entity, such services would still have been intrinsically linked with the assessee's business of sale of software. Therefore, the aggregation approach adopted by the assessee is justified both on facts and in law. 73. The learned AR submitted that the learned DR has not brought on record any material difference in facts between Assessment Years 2018-19 and 2022-23 vis-à-vis the captioned assessment year. It was submitted that the benchmarking undertaken for all the disputed international transactions remains the same in the preceding and subsequent assessment years as well as in the year under consideration. 74. The learned AR further submitted that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ween IVP India and IVP US, placed at pages 473 to 478 of the paper book. 78. The assessee also furnished sample email communications between IVP India and IVP US personnel at pages 809 to 821 of the paper book. It was submitted that the summary of these emails was also filed during the assessment proceedings and clearly establishes that IVP US was not merely raising invoices to IVP India customers, but was also supervising overdue accounts of clients, following up for recovery, and maintaining customer details. Thus, according to the learned AR, the services rendered by IVP US were real, identifiable and business-connected. 79. The learned AR further submitted that during the assessment proceedings, the assessee furnished detailed documentary evidence demonstrating that services were rendered by IVP US personnel to clients of the assessee. The details were summarised as under: 80. In the case of Shri Kunal Hemchand Savla, who rendered services in relation to Aurelius Capital Management, the assessee furnished copies of timesheets in respect of work performed for India project at pages 1458 to 1462 of the paper book, invoices raised by IVP India to its clients substantiatin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....yee of IVP US at pages 1716 to 1720 of the paper book. 84. The learned AR further submitted that, in addition to the aforesaid evidence, the assessee filed additional submissions dated 07.08.2024 before the DRP, wherein detailed rebuttals were furnished against various contentions raised by the TPO in respect of IT support/managed/consulting services availed from the foreign AE. Reference was made to pages 1138 to 1141 of the paper book. 85. The learned AR therefore submitted that the assessee had discharged the onus of proving need, rendition and benefit of the intra-group services by filing contemporaneous agreements, FAR analysis, email communications, timesheets, invoices, customer-related documents, internal ticket records and W-2 forms of IVP US employees. It was submitted that the TPO/DRP disregarded these evidences on incorrect factual premises and proceeded to determine the ALP at Nil, which is impermissible. 86. The learned AR finally submitted that, in view of the evidence furnished in respect of marketing services and support/managed/IT consulting services availed from IVP US, the TPO ought to have accepted the benchmarking adopted by the assessee and no transf....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Reliance was placed on Knorr-Bremse India (P.) Ltd. vs. ACIT, 380 ITR 307, and Faurecia Automotive Seating India (P.) Ltd. vs. ACIT, 141 taxmann.com 126. 91. The legal position is that aggregation is permissible where transactions are closely linked. Rule 10A(d) defines "transaction" to include a number of closely linked transactions. In Faurecia Automotive Seating India (P.) Ltd., the Pune Bench, after referring to Knorr-Bremse India (P.) Ltd., observed as under: 92. We have heard the rival submissions, perused the orders of the TPO/AO and learned DRP, and considered the material referred to by both sides. We have also considered the judicial precedents cited before us. The assessee has challenged the following transfer pricing adjustments: Particulars MAM (as per TPO) Transfer Pricing Adjustment (Amount in INR) Sale of software to IVP TNMM 4,46,46,159 Availing of marketing support services from IVP US Other Method 20,18,81,726 Provision of support / IT consulting / managed services to IVP US TNMM 6,05,78,458 Availing of support / managed services from IVP US Other Method 41,85,62,932 Total: 72,85,37,845 93. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al transactions between two or more AEs can form a single composite transaction if they are closely linked. In the headnote, the ratio is recorded thus: "Several transactions between "two or more" AEs can form a single composite transaction if such transactions are closely linked." The Hon'ble High Court also held that if it is established that sale of goods and/or provision of services formed one composite indivisible transaction, TNMM cannot be applied selectively to some components and CUP or any other method to the remaining components. At the same time, the Hon'ble Court cautioned that merely because each input or service contributes to the final business activity, it does not automatically become part of a composite transaction. The onus is on the assessee to establish the linkage. The propositions emerge from paragraphs 21, 38 and 40 to 47 of the judgment. 98. The Co-ordinate Bench in Faurecia Automotive Seating India (P.) Ltd. vs. ACIT, after considering Knorr-Bremse, held in paragraphs 6.2 and 6.3 that "transaction" may include plural transactions, but only if such transactions are closely linked. The Co-ordinate Bench observed that aggregation cannot be allowed where t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee's business model shows that IVP US acted as the distributor/customer-facing entity in the overseas market. The software sale, customer interface, marketing activity and product support were part of the same commercial chain. Therefore, the mere fact that the services were described separately in agreements or accounts does not sever their commercial interdependence. 103. The Hon'ble Bombay High Court in Cummins India Ltd. vs. ACIT (supra), has materially guided this issue. In paragraph 11, the Hon'ble Court held that once TNMM was accepted as the most appropriate method for the relevant set of international transactions, it was not open to the TPO to subject only one element to a different method. The Hon'ble Court observed that adoption of a method as most appropriate ensures application of one standard or criterion and that disturbing it by applying different methods to different elements would cause distortion and "spell chaos". 104. In the present case, the TPO has accepted TNMM for certain transactions but carved out intra-group services and applied "Other Method" to determine their ALP at Nil. In our view, once the assessee has demonstrated that the sale of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....): "8. We find that the basic reason of the Transfer Pricing Officer's determination of ALP of the services received under cost contribution arrangement as 'NIL' is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an Assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an Assessee and what is not. An Assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ak-up showed service rendition. 110. Thus, Cushman and Wakefield does not mean that the TPO is powerless to examine whether services were rendered. It means that if services are evidenced, the TPO cannot determine ALP at Nil merely because he considers the services unnecessary or insufficiently beneficial. His duty is to determine what an independent party would pay in a comparable situation by applying an accepted transfer pricing method. 111. The Hon'ble Punjab and Haryana High Court in Knorr-Bremse India (P.) Ltd. further held that the answer to whether a transaction is at arm's length is not dependent upon whether the transaction results in increase in profit. It was held that mere failure to establish increase in profit does not show that the transaction is not at ALP. This proposition is reflected in paragraph 21 of the judgment. 112. The Pune Bench in Faurecia Automotive Seating India (P.) Ltd. also held that where detailed e-mail communications proved rendition of intra-group services, Nil ALP could not be sustained merely because the TPO was not satisfied with the benefit. The headnote records that detailed e-mail communications between the assessee and AEs abunda....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re intangibles. It was therefore selected as the tested party. 118. The learned DR submitted that foreign AE could not be accepted as tested party because its data was not reliable, annual reports of foreign comparables were allegedly not furnished, and segmental results were not part of audited financial statements. 119. The legal position is that there is no absolute bar against selecting a foreign AE as tested party. In PCIT vs. Almatis Alumina (P.) Ltd., [2022] 137 taxmann.com 202, the Hon'ble Calcutta High Court held, in paragraph 5, that the tested party should normally be the least complex party to the controlled transaction and that there is no bar for selection of either local or foreign party. The Court held that neither the Act nor the transfer pricing guidelines prohibit selection of a foreign AE as tested party. The headnote records the ratio that, where the assessee company is more complex compared to its foreign AE, the foreign AE could be selected as tested party. 120. In paragraph 4 of Almatis Alumina, the Hon'ble Court noted the FAR profile and observed that the assessee was a more complex entity when compared to its AE. The Court therefore found no infir....
X X X X Extracts X X X X
X X X X Extracts X X X X
....shed by taking note of the issue which was involved in the said case and the discussion is in paragraph 26 of the judgment quoted above. After noting several decisions, it was held that the Indian Transfer Pricing guidelines issued by the Institute of Chartered Accountants of India vide guidance note on report under Section 92E by Institute of Chartered Accountants of India and transfer pricing guidelines issued by OECD does not prohibit associated enterprises to be a tested party. The Tribunal accepted the stand taken by the assessee that the associated enterprises can be selected as a tested party. In the light of the decision in the case of Virtusa Consulting Services (P) Ltd. as well as on the factual aspect which has been noted by the Tribunal with regard to the function, asset and risk profile of both the assessee-company and the associated enterprises, we are of the considered view that the finding rendered by the Tribunal is just, proper and legally valid." 122. The Hon'ble Madras High Court in Virtusa Consulting Services Pvt. Ltd. vs. DCIT, TS-45-HC-2021(MAD)-TP, also admitted and considered the question whether the Tribunal was justified in rejecting the approach of co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....were placed in Volume III of the paper book. 128. The learned DR submitted that each year is separate and that the facts of this year were materially different due to abnormal increase in intra-group service expenditure. 129. The principle of consistency does not mean that an incorrect approach must be perpetuated. However, where there is no material change in the business model, contractual arrangement, FAR profile, nature of transactions or benchmarking method, the Revenue must demonstrate a cogent reason for taking a different view. 130. The Hon'ble Bombay High Court in Cummins India Ltd., particularly paragraphs 12 and 13, emphasised that where the Revenue accepted the aggregation approach in other years and there was no material change in facts, a different approach in the impugned year was not justified. The Court noted that the TPO and DRP had not stated that facts were different from earlier years. The relevant paras are reproduced below: 12. Further the Tribunal was totally incorrect in saying that accepting aggregation of royalty payment with other international transactions under the manufacturing segment for the Assessment Year 2006-2007 was in the con....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the learned DR has referred to increase in expenditure and decline in revenue. Such financial fluctuation may justify a closer examination of the genuineness and ALP of services, but it does not constitute a change in FAR profile, business model or contractual arrangement. The Revenue has not shown that the functions of IVP India or IVP US changed in the year under consideration, or that the agreements or nature of transactions were materially different. 132. Therefore, the acceptance of the same approach in earlier and subsequent years is a strong supporting factor in favour of the assessee. The learned DR"s contention on this aspect is rejected. Ground No. 3.8, duplicative adjustment 133. The assessee submitted that the TPO made a duplicative adjustment by determining the ALP of intra-group services at Nil and simultaneously making adjustment in respect of sale of software/provision of services under TNMM, where the intra-group service cost formed part of the operating cost base. 134. We find merit in this contention in principle. Once a cost is considered while computing operating margin under TNMM, a separate adjustment by treating the same cost at Nil would resul....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee and made the transfer pricing adjustment on that basis. It appears that the assessee did not raise this issue during the proceedings before the TPO. However, before the DRP the assessee has raised such an issue contending that the assessing officer failed to provide due cognizance to the fact that in relation to the purchase of the finished goods, receipt of commission and sale of finished goods, the assessee was engaged in trading functions and on the contrary selected a set of comparables having different functional profile. The DRP, on noting that such issue was raised by the assessee before it for the first time, forwarded the contention to the TPO for his consideration and submit a remand report. The TPO in his remand report held that the segmentation of profitability provided by the assessee has no basis and is far fetched and not audited. Upon consideration of the remand report submitted by the TPO, the DRP accepted the same and denied relief to the assessee for the assessment year 2012-13. However, for the assessment year 2013-14 and the subsequent assessment year 2014-15 the DRP has accepted the stand of the assessee with regard to the segmentation of the profita....