TaxTMI 
TaxTMI 
2021 (9) TMI 1593
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.... not raised any objection. In view of the above, the appeal filed by the revenue is not maintainable. Hence, the same is dismissed. 3. Since the appeal filed by the revenue is dismissed the C.O. filed by the assessee becomes infructuous and hence dismissed. 4. Now we take up the appeal filed by the assessee for the A.Y. 2011-12 against the order passed by the Ld. DRP-1, Bangalore dated 29.12.2015 u/s 144C(5) of the Income-tax Act, 1961 ['the Act' for short]. Ground Nos.1 to 3 are as follows: 1. "The learned Assessing Officer ("Ld. AO") and the Honourable Dispute Resolution Panel ("DRP") grossly erred in determining transfer pricing ("TP") adjustment of Rs 2,246,727/- to the Arm's Length Price ("ALP") of the Appellant's international transactions with its Associated Enterprises ("AEs") in the software development services segment; 2. The Ld. AO and the DRP grossly erred in determining TP adjustment of Rs 33,591,178/-to the ALP of the Appellant's international transactions with its AE in the marketing support services ("MSS") segment; 3. The Ld. AO / learned Transfer Pricing Officer ("Ld. TPO") erred in rejecting the transfer prici....
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....s: International Transaction Amount (in) Purchase of Instruments Spare Parts 1,29,47,876 Provision for marketing Services 18,28,61,849 Engineering IT Services 2,46,04,938 Total 22,04,14,66 7.2. AS PER TOP: The TPO vide his order dated 22 January 2015 made the following Transfer Pricing Adjustments Particulars Amount (Rs) Software Development Services 25,82,366 Marketing Support Services 4,07,87,928 Total 4,33,73,294 7.3. AS PER DRAFT ASSESSMENT ORDER ("DAO"): The AO has passed the DAO on 13 March 2015 proposing to make the following adjustments to the returned income of the assessee: Particulars Amount (Rs) TP adjustment 4,33,73,294 Disallowance of provision made for slow moving stock 14,73,296 Total 4,48,46,590 The assessee being aggrieved by the additions proposed in the DAO, filed its objections before the Hon'ble Dispute Resolution Panel ("DRP"). 7.4. AS PER DRP: The Hon'ble DRP disposed of the objections filed by the Assessee vide directions dated 29 December 2015 providing partial relief to the assessee. 7.5 AS PER FINAL ASSESSMENT ORDER ("FAO") :. The AO passed th....
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....ogy and the description. Further, it has been observed that where segmental information has been allocated based on allocation instead of actuals, the correct segmental margin cannot be ascertained and hence, upheld the order of the TPO. Accordingly, the Ld. AO passed the Final Assessment Order ("FAO") giving effect to the directions of the DRP. 9.4 Submission of A.R .: At the outset, it is submitted that the marketing support services provided to the AE are different from the AMC services provided to third party customers. The DRP however, rejected the objections filed by assessee and upheld the findings of the TPO. The assessee submits that with respect to the transaction between assessee and the third party, the assessee enters into AMC with the third party customers directly to render out of period warranty services for the products of AE sold to the customers in India. In this case, the agreement is in between the assessee and the third party. Further, all the costs incurred in providing the services under AMC are borne by assessee itself. Therefore, it is submitted that the - a. The assessee independently enters into AMC with the third party customers wit....
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....market support services are charged back to the AEs along with a mark-up; and c. The assessee does not bear any kind of market risk, debtors/credit risk as it is compensated on a cost plus basis. d. The agreement is with AE outside India From the above, it is abundantly clear that the activities undertaken and the compensation model are distinct from the marketing service provided to the assessee and hence, the same should be looked as separate segments. Without appreciating the above fact and circumstances of the case, the DRP confirmed the order of the TPO and have proceeded to aggregate the third party transaction along with the international transaction on the ground that correct segmental details cannot be ascertained. Allocation of segment revenue and costs: The assessee wishes to produce the segment profit and loss account of the assessee which has been submitted during the assessment proceedings (refer page 274 and 308 of Paper book-Vol 1): Particulars Revenue Reference Basis of allocation Sales support IT services service Trading of instrument, spare parts Third Party (AMC and Others) Total Se....
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.... Profit before taxes (PBT) 1,595,329 10. The Ld. D.R. submitted that assessee is rendering AMC to non-AEs in India, which is functionally similar to the so called market support services rendered to the A.E. in India except the terminology and the description. The segmental information provided as certain allocation based on revenue, instead of the actual expenditure, in such circumstances, it is not possible to arrive at correct segmental margin and therefore TPO approach has to be upheld. 11. We have heard the rival submissions and perused the record. In this case, TPO aggregated maintenance services to non AE with similar services rendered to AE as a single segment for comparability purpose as under TNMM method in the case of MSS Segment. In our opinion, this is not possible. However, assessee has to furnish complete segmental information on actual basis which the assessee not provided before the lower authorities. Accordingly, we remit the issue to the file of TPO/AO with the direction to assessee to furnish actual segmented details of market support services rendered to the AE in India. ....
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....to be 4 years and accordingly, amortization of the same has been done. Accordingly, goodwill amounting to Rs 3,09,67,437 was written off during the financial year ("FY") 2010-11 relevant to the subject AY 2011- 12 (refer pages 9 and 21 of Paper book-Vol I). Further, the assessee submits that the said amount of Rs 30,967,437 was suo moto disallowed by the assessee in the return of income filed for the AY 2011-12 (refer Income- tax return, computation of total income and tax audit report in pages 35, 45 and 61 of Paper book Vol I respectively). 13.4 The assessee had included the amortisation of goodwill cost in the Third party (AMC/others) segments (refer page 269 of Paper book- Vol 1). 13.5 The TPO in his order has aggregated the AE and non-AE transaction of the assessee in the 'marketing support services' segment and determined the profit level indicator ("PLI") at 0.11 percent being the ratio of operating profit over operating cost. The Ld. TPO has included the amortization amount of Rs 30,967,437 for computing the PLI of the assessee holding the same to be operating in nature. 13.6 The DRP while upholding the order of the Ld. TPO failed to take note of the inclus....
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....re of the opinion that amortization of goodwill is an extraordinary item and is not pertinent to the regular operation of the assessee and hence non-operating in nature. However, this issue is not emanated from the order of the DRP. We are refrained from commenting on this issue. The remedy lies with the assessee before the DRP on account of biding proceedings u/s 154 of the Act, which may be pursued by the assessee. This ground of assessee is dismissed. 16. Ground Nos.9 & 10 are dismissed as not pressed. 17. Ground No.11 related to Software development services which is reproduced below: The DRP erred in rejecting the following companies despite the same being functionally comparable to the appellant and qualify the filters applied by the Ld. TPO. The comparables therefore ought to have been accepted as comparable: a) Synfosys Business Solutions Ltd. b) CG-VAK Software & Exports Ltd. c) Evoke Technologies Ltd. d) R.S. Software (India) Ltd. 17.1 Out of 4 comparables, R.S. Software India Ltd. comparable (d) is not pressed by A.R. and dismissed accordingly. 17.2 Now coming to first comparable (a) Synfosys Business Solutions Ltd....
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....ing one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing services by ..... would have no bearing on the profitability of the said entity'. In view of the above, we do not find any infirmity in exclusive of the above company from comparables, the employees cost filter of 25% applied by the TPO which finds support from the decision of the Hon'ble Delhi Bench of ITAT in the case of Navisite India PVt. Ltd. in ITA No. 5329/2012." 20. The contention of the AR is that the issue may be remitted to the TPO/AO to consider the relevant employees data and decide afresh. Relevant cost may be obtained by AO/TPO by issuing notice u/s 133(6) of the Act. 21. We have heard the rival submissions and perused the record. We find force in the argument of Ld. A.R. if the relevant data relating to employees cost is not available in respect CG VAK software and exports ltd., it ought to have been collected by the TPO by exercising power u/s 133(6) of the Act. Accordingly, the issue remitted to the AO for fresh consideration. 22. Evoke Technolo....
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....milarly, an entity may book entire salary expense under one head, while another may bifurcate it into different parts and include some part in Marketing expenses or Factory overheads etc. In such a case also, the comparison of 'Salary' expense in separation will be meaningless. In the like manner, one company may use more rented premises or vehicles in comparison with the other, which has its own premises and vehicles. Whereas in the case of the former, the amount of rent or vehicle maintenance charges will be higher, but the amount of depreciation in the case of the later will be more because of use of more assets of its own rather than taking the facility of hired ones. The crux of the matter is that a higher amount of a particular expenditure per se can be no reason to claim adjustment in profit ratio. That is the reason for which the legislature has provided for comparing composite figure of operating profit which envelopes the overall effect of all the items of operating expenses and revenues. One is not laying down the proposition that once the operating profit is ' available, then no adjustment is possible. Sub-clause (iii) to rule 10B(1)(e) clearly provides that....
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....ologies Ltd." 27. The contention of the A.R. is that on account of turnover filter and related party transaction filter, this comparable has to be excluded. Further, regarding Persistent Systems it was submitted that it has diversified activities and functionally not comparable on the reason that it has product revenue, on site operations and having turnover greater than Rs.500 crores and also having related party transactions. Further, regarding Sasken Communications, it was submitted that that company functionally different and having diversified activities and huge turnover. 28. The Ld. D.R. submitted that this company specialized in software product development services and its partner closely with the world's largest technology branch innovative enterprises and pioneering start ups to provide end to end product development services. The company has 297 customers with whom the company has long term contact for software development. It is also evident that company is predominantly engaged in outsourcing software product development services. The company is comparable with the assessee's functions being the activities of this company is comparable with the assessee ....
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.... have considered the rival submissions as well as the relevant material on record. We find that the assessee has raised objections against this company before the DRP. However the DRP did not adjudicate the objections raised by the assessee. The decision of this Trintinal in the case of M/s. Electronics for Imaging India (P.) Ltd. v. DCIT (supra) relied upon by the learned Authorised Representative is based on two aspects (i) The information received under Section 133(6) of the Act was considered by the TPO without sharing with the assessee and (ii) nature of the activity is KPO. It is pertinent to note that the question of BPO and KPO is relevant only in ITES segment and not for software development services segment. On the contrary, the decision in the case of Toluna India (P.) Ltd v. ACIT (supra), pertains to the Assessment Year 2007-08, therefore the facts of the different year cannot be applied without verification. Accordingly, we set aside this issue of comparability of E-Jest Solutions Ltd. to the record of the Assessing Officer/TPO for deciding the same after verification of the relevant facts as well as considering the objections of the assessee. (ii) Persistent ....
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....ver, the DRP has rejected the said company. Therefore, the said company should be retained in the list of comparables. 61. Having considered the rival submissions as well as relevant material on record, at the outset, we note that the DRP has examined the functional comparability of this company by considering the relevant details as given in the annual report of this company. The DRP has given the finding that the entire revenue has been earned by this company from the sale of software services and products and in the absence of segmental details, it cannot be considered as comparable with software services segment. We find that this company has shown the income from sale of software services and products to the tune of Rs.6.67 crores. We further note that as per Schedule 11, the entire revenue has been shown under one segment i.e., sale of software services and products. Therefore, no separate segment has been given in respect of software services. Accordingly, the composite data of revenue as well as margins of this company pertaining to the sale of software services and products cannot be considered as comparable with the software development services segment of the as....
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....ee cost filter. The Id. DR has submitted that the TPO has applied the employee cost filter and this company satisfies the same. 16.2 On the other hand, the learned Authorised Representative of the assessee has submitted that the total employee cost of this company is 11.51 of the total operating revenue therefore it fails the employee cost filter of 25%. Further he has pointed out that this company also fails the software development services revenue filter of 75%. He has referred the details at page Nos. 39 and 53 of the Annual Report and submitted that the income from software development is Rs.81.40 Crores out of total revenue of Rs. 141 Crores. Therefore this company fails this filter. 16.3 In a rejoinder the Id. DR has submitted that the TPO has considered only Information Technology transactions segment and therefore it satisfies software development services income filter as well as employee cost filter. 16.4 We have considered the rival submissions as well as the relevant material on record. As per the segmental reporting at page 53 of the Annual Report the income from Information Technology Services is Rs. 81.40 Crores out of the total income of ....
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....pany is 18.66%. The DRP rejected objections of the assessee on the ground that TPO has applied 25% filter of RPT and annual report of the company does not show any other services rendered other than software development services provided by this company. Thus the DRP held that software development segment is comparable to the assessee and therefore this company has to be retained as comparable. 63. We have heard the Id. AR as well as Id. DR and considered the relevant material on record. The Id. AR has submitted that this company is having 18.66% RPT and further this company earns revenue from both services and products. Thus, the Id. AR submitted this company is also in the software products and therefore cannot be considered as good comparable. He has further contended that in a series of decisions, the Tribunal has applied 15% RPT filter and since this company is having more than 15% RPT, the same cannot be considered as a good comparable. 64. On the other hand, the Id. DR has submitted that TPO has applied RPT filter of 25% and therefore only for this company, the RPT cannot be reduced to 15%. Further, the DRP has examined annual report of this company and fou....
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....ort under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd v. ACIT, 137 ITD 1(Mum). 31. The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies (P) Ltd. (supra). 32. We have heard the Id. DR as well as Id. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged in diversified activities of product design services, innovation design, engineering services, visual computing labs, etc. We further note that in the case of Telcordia Technologies (P.) Ltd. (supra), the Mumbai Bench of the Tribunal vide its order dated 11.5.2012 in para 9.....
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.... not comparable in the case of Electronic Imaging India Pvt. Ltd. in IT (TP)A No.1506/Bang/2016, where in it was held as under: "9. The functional comparability of these two companies have been examined by the Delhi Bench of ITAT in the case of Saxo India (P.) Ltd (supra) in paras 10.1 to 10.2 and 15.1 to 15.2 as under: " (i) E-Infochips Limited: 10.1 The Transfer Pricing Officer included this company in the list of comparables. On being called upon to explain as to why it should not be considered as a comparable, the assessee contended that there was functional dissimilarity inasmuch as this company was engaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenues of this company from Products was only 15% of total revenue and hence the same qualified to be eligible for comparison. The DRP did not allow any relief. 10.2 After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue ....
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....on Technologies Ltd. that in the said case the DRP did not adjudicate the objections of the assessee. Therefore in view of the decision of the Delhi Bench of the Tribunal in the case of Saxo India (P) Ltd (Supra) which has been confirmed by the Hon'ble Delhi High Court, we direct the TPO/AO to exclude these two companies from the set of comparables." 33. Taking a consistent view, we are inclined to direct the AO/TPO to exclude this comparable from the list of comparables to determine the ALP of international transaction. 34. Ground Nos. 13 & 14 are as under: 13. The Ld. AO/DRP has erred in the computing the negative working capital adjustment without considering the fact that the appellant does not have any working capital risk; 14. The LD. AO/DRP erred in proposing a restriction to the working capital adjustment without giving any cogent reason. 35. The Ld. A.R. submitted as follows: The TPO after arriving at average margin of the comparable companies at of 24.82 percent%, worked out a negative working capital adjustment of 1.24% percent, thereby making determining the ALP at 26.06%. The Assessee submits that working capital adjustment is made ....
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....before this Tribunal in the case of e4e Business Solutions India Pvt. Ltd. (ITA No.2900/Bang/2018 dated 8.12.2020), wherein it was held as follows: "12.The third issue is with regard to grant of negative working capital adjustment. Working capital adjustment is made for the time value of money lost when credit period is given to customers. It is the submission of the Id. counsel for the assessee in this case that the assessee is a captive unit which is entirely funded by the AE. The assessee has no borrowings and is fully compensated by the parent on a total cost plus. The assessee has no working capital risk - in other words, it is a risk-insulated service provider to the parent. The only customer of the company is its parent company. The Id. counsel for the assessee has relied on a host of ITAT decisions, the main decision being that of M/S. Software AG Bangalore Technologies Pvt. Ltd.(supra) which in turn has relied on the decision of ITAT Hyderabad in the case of Adaptec (India) Private Limited and contended that no negative working capital adjustment is called for. The Id. DR's reliance is on the decision in the case of Technotree Convergence P. Ltd. (supra) where....