TMI Blog2016 (10) TMI 1135X X X X Extracts X X X X X X X X Extracts X X X X ..... nclusion, we allow the ground no. 1 raised by the assessee by declaring that the reassessment order of the ld AO is bad in law and void ab initio. Adjustment to ALP - TPA - comparable selection - Held that:- The assessee vis a vis the group is involved in the execution of the software development and coding of software service (“software services”) outsourced to it by LVS US, thus companies functionally dissimlar with that of assessee need to be deselected from final list of comparable. ALP of Royalty payments - Held that:- TPO had erred in determining the ALP of Royalty payments at Rs Nil and accordingly direct the ld TPO to allow the deduction for payment of Royalty as the same is also duly benchmarked by the assessee which were not disputed by the revenue and we hold that royalty @ 40% paid by the assessee is at ALP. Accordingly, the grounds raised by the assessee in this regard are allowed. - I.T.A No. 1051/Kol/2015, I.T.A No. 599/Kol/2015, I.T.A No. 617/Kol/2015 - - - Dated:- 19-10-2016 - S. S. Viswanethra Ravi (Judicial Member) And M. Balaganesh (Accountant Member) For the Assessee : Mawheet Dalal, Advocate Gunjan Khanna, AR For the Revenue : G. Mallikarj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... around objecting to the validity of the reassessment framed by the ld AO by making an adjustment to ALP based on order of the ld TPO u/s 92CA(3) of the Act which was admittedly made vide illegal reference to ld TPO before the initiation of reassessment proceedings when the assessment proceedings were not pending by way of selecting the case for scrutiny. Apart from this, the assessee also preferred appeal on merits of the addition made towards adjustment to ALP, among others. 2.2. The ld AR filed a chart reflecting the list of dates and gists explaining the chronology of events from the date of filing the return till the date of passing of final assessment order by the ld AO pursuant to the order of the ld DRP. The various arguments of ld AR are summarized below:- (i) The return filed by the assessee was not selected for scrutiny by issuance of notice u/s 143(2) of the Act. Hence it could be concluded that no assessment proceeding was pending at that time. (ii) Without the pendency of valid assessment proceeding, the ld AO made reference to ld TPO u/s 92CA(1) of the Act for determination of ALP . The assessee co-operated with the proceedings of ld TPO. (iii) The ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment proceedings for determination of ALP, the ld AO ought not to have passed any draft assessment order on 15.9.2014 and instead should have passed the final reassessment order as is done regularly. Hence the reassessment order passed by him is void abinitio and bad in law. (xiv) The final order passed by the ld AO dated 8.7.2015 is bad in law in as much as the ld AO failed to comprehend the facts and circumstances of the case and apply the ld DRP s order in the proper legal perspective. (xv) The ld AR argued by placing reliance on the provisions of section 153(2) of the Act that reference u/s 92CA of the Act could be made only during the course of assessment or reassessment proceedings. He placed reliance on Instruction No. 3 dated 20.5.2003 in this regard. Based on the aforesaid legal arguments, he prayed for deletion of the addition in the sum of ₹ 2,43,53,752/-made in the reassessment. 2.3. In response to this, the ld DR argued that there is no requirement of pendency of scrutiny of assessment proceedings for making reference to ld TPO . It is purely in the discretion of the ld AO to refer the case to ld TPO for determination of ALP. The reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld as below:- 4. We have heard the rival submissions and perused the materials available on record. We find that the whole scheme of assessment proceedings have to be looked into for deciding the case before us. Normally when a return is filed by the assessee, it would either get completed u/s 143(1) of the Act by receiving intimation from the Assessing Officer. If the case is selected for scrutiny by issuance of notice u/s 143(2) of the Act within the prescribed time, then the assessment would get completed u/s 143(3) or 144 of the Act. Hence it is well settled that when no scrutiny notice u/s 143(2) is served on the assessee, the assessment would deemed to be completed based on intimation u/s 143(1) of the Act, if served on the assessee, or the acknowledgement of return itself would be deemed to be the assessment order. Hence practically the assessment gets completed at this stage itself in the belief of the assessee unless otherwise reopened by issuing separate notice u/s 148 of the Act. The reference to Learned TPO for determination of ALP of international transactions have been spelt out in the statute u/s 92CA of the Act. For the sake of convenience, the relevant provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are more than one international transaction with an associated enterprise or there are transactions with more than one associated enterprises the aggregate value of which exceeds ₹ 5 crores, the transactions should be referred to the TPO. Before making reference to the TPO, the Assessing Officer has to seek approval of the Commissioner / Director as contemplated under the Act. Under the provisions of section 92CA reference is in relation to the international transaction. Hence all transactions have to be explicitly mentioned in the letter of reference. Since the case will be selected for scrutiny before making reference to the TPO, the Assessing Officer may proceed to examine other aspects of the case during pendency of assessment proceedings but await the report of the TPO on the value of international transaction before making final assessment. The threshold limit of ₹ 5 crores will be reviewed depending upon the workload of the TPOs. The work relating to selection of cases for scrutiny and reference to TPO on the above basis in respect of pending returns filed for the assessment year 2002-03 should be completed by June 30, 2003 . From the aforesaid Ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 143(2) of the Act was issued pursuant to filing of the original return, the assessment is deemed to have become final. In reply to the notice issued u/s 148 of the Act, the assessee filed a letter dated 21.4.2004 requesting the Assessing Authority to treat the return filed on 31.10.2002 as return in compliance with the notice u/s 148 of the Act. Infact the TPO on 20.1.2005 passed an order u/s 92CA of the Act accepting the pricing of the Assessing Authority. However, the CIT invoking his power u/s 263 of the Act initiated proceedings and set aside the order of the Assessing Authority on the ground that it is erroneous and prejudicial to the interest of the revenue. It is against that order, the assessee preferred an appeal to the Tribunal. The Tribunal has held that when two views are possible and when the TRP has accepted valuation by the Assessing Authority determining the arm s length price, the commissioner had no jurisdiction to interfere with the said order u/s 263 of the Act and moreover on the day the reference was made by the Assessing Authority, there was no return pending for consideration and therefore, the Tribunal has set aside the order of the Commissioner. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a report called by an authority having no jurisdiction would be a nullity at law and consequently proceedings based solely on such report considering the requirement of section 17 would be illegal and will have to be quashed. In effect thus, it is held that when reference itself is invalid, the report received as a result of the said reference cannot constitute material for forming the belief that an income or wealth tax has escaped assessment. The order passed by the Learned TPO passed pursuant to an illegal reference cannot be used in the reassessment proceedings by the Learned AO as both the proceedings are separate and independent of one another. In view of the above, we hold that the reassessment proceedings initiated based on the TPO s order dated 28.1.2014 suggesting an adjustment of ₹ 7,51,20,484/-to ALP (which was based on an illegal reference ) by the Learned AO is void ab initio and bad in law. In view of the aforesaid facts and circumstances and respectfully following the aforesaid decision, we hold that the reassessment proceedings initiated based on the ld TPO s order dated 29.1.2013 suggesting an adjustment of ₹ 2,43,53,752/-to ALP was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than ₹ 10 lacs and is squarely covered by the latest CBDT circular. 3.2. We have heard the rival submissions. We find that the following workings were provided by the ld AR before us to prove that the tax effect on the disputed addition is less than ₹ 10 lacs :- Computation of TP adjustment based on original TPO order dated 30.1.2014 Operating Cost ₹ 10,81,62,982 ALP @ 40.34% ₹ 15,17,95,929 Less: Sales with Non-AE ₹ 2,61,49,487 Sales to AE (excluding reimbursement of expenses) ₹ 11,54,80,823 TP Adjustment ₹ 1,01,65,619 Computation of TP adjustment based on revised TPO order dated 23.2.2015 Operating Cost ₹ 10,81,62,982 ALP @ 39.25% ₹ 15,06,16,952 Less: Sales with Non-AE ₹ 2,61,49,487 Sales to AE (excluding reimbursement of expenses) ₹ 11,54,80,823 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e first issue to be decided in this appeal is as to whether the ld DRP is justified in partially upholding the adjustment to ALP made by the ld TPO / ld AO in the facts and circumstances of the case. 5.1. The brief facts of this issue is that the Labvantage Solutions Private Limited ( LVS India ) and Labvantage Solutions inc. ( LVS US / AE ) are group companies as both are directly or indirectly held by TCG Lifesciences Ltd. LVS US is a global solutions provider that helps companies optimize their laboratory productivity, and leverage the latest information management and communication technologies in order to effectively share analytical data throughout their worldwide organizations. LVS US is engaged in development, marketing of Laboratory Information Management Systems (LIMS) Software , testing and customer configuration services, provision of local sales and customers support services. The proprietary software is conceptualized and owned by LVS US. LVS India is engaged in the development and customization of LIMS for its AE. The software development and customization work is sub-contracted by LVS US to the assessee. The assessee vis a vis the group is involved in the exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated Enterprises ( AEs ) 2.3. The learned AO, DRP and TPO failed to take cognizance that the Domestic segment of the Appellant is deemed to be at arm's length, since the same includes revenue from third-party customers under uncontrolled circumstances. 3. Erroneous disallowance of the Royalty payment 3.1 The learned AO, DRP and TPO erred in determining the arm's length price of the royalty paid at 'NIL' while determining the amount of adjustment. 3.2 The learned AO, DRP and TPO also erred in not appreciating the separate benchmarking analysis done by Appellant, by virtue of which such payment of royalty by the Appellant to its AEs was determined at arm's length. 3.3 The learned AO, DRP and TPO erred in not appreciating that the Appellant did not pay any price to its AE for purchase of software, licensed to third party customers. Further, the Appellant was also allowed a license free period, wherein, the entire revenues generated from such sale was retained by the Appellant. Also, the updates in relation to such software is provided free of cost by the AE to the Appellant. 3.4 The learned AO, DRP and TPO erred in not taking cogniza ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee are as follows:- Sl. No. Name of the Company Weighted Average NCP (%) (FY 2008-2010) 1 Akshay Software Technologies Ltd 10.38 2 CG-Vak Software Exports Ltd 4.59 3 Eforce India Private Limited 3.21 4 Evoke Technologies Private Limited 20.82 5 Helios Matheson Information Technology Ltd 22.58 6 L G S Global Ltd 17.70 7 Mindtree Ltd 14.48 8 Persistent Sytems Ltd 22.34 9 Powersoft Global Solutions Ltd 17.60 10 R S Software (India) Ltd 9.06 11 R Systems International Ltd 15.16 12 Sasken Communication Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee preferred objections before the ld DRP against the adjustments made to ALP by the ld AO / ld TPO who disposed off the objections by giving the following directions :- (a) Sustained adjustment made towards Royalty of ₹ 72,84,012/-. (b) Allowed exclusion of recovery transaction amounting to ₹ 1,37,88,142/-for determining the TP adjustment and thereby an upward adjustment in respect of software services provided to AE was made at ₹ 74,92,375/-. (c) Allowed working capital adjustment and therefore recalculated the ALP of TPO s comparables at 39.25%. 5.8. Incorporating the ld DRP s directions, the ld AO made a revised adjustment to ALP of ₹ 1,47,76,387/-as below:- Upward adjustment for software development Service (Sales to AE) 74,92,375 Upward adjustment for royalty 72,84,012 1,47,76,387 6. The ld AR stated that the main dispute lies here is in the selection of comparables. He prayed for exclusion of the following comparables chosen by the ld TPO :- (i) E-Infochips Bangalore Ltd ; (ii) Infinite Data System ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment of software, maintenance, system integration, implementation, testing and infrastructure management services. Further it is stated from the records that the revenue is primarily driven from technical support and infrastructure management services. Further, as per the Annual Report of 2009, at Page 1, it is stated that the Holding Company M/s Infinite Computer Solutions (India) Limited signed an agreement (Build, Operate and Transfer Model) with Fujitsu Services Limited to set up Global Delivery Centers in India to provide offshore delivery capabilities to Fujitsu Fujitsu s associated companies. Infinite Data Systems commenced its operations on 1st January 2009 and as per segment reporting disclosure, the company s operations predominantly relate to providing software technical consultancy services to its sole customer Fujitsu Services Limited. The ld AR argued that these facts have also been acknowledged by the ld TPO at page 77 of his order. Also, it would be worthwhile to note that Infinite Data Systems Pvt Ltd completed its three years contract with Fujitsu, post which, the business was transferred to Fujitsu and thus the company has been merged with its Holding Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... WIFT software to its clients of the user of SWIFT in financial industry. The ld AR stated that Akshay Software is a company engaged in software development activities. The income schedule as disclosed in the annual report of the said comparable clearly demonstrates that the company is engaged in software services. However, the USA based subsidiary of the company i.e Akshay Software International Inc. (Akshay US) is a registered partner of SWIFT selling SWIFT solutions and products as an extended arm of SWIFT in North America. Thus the contention of the ld TPO / ld AO is erroneous since it is clearly evident from the annual report of the comparable company itself that it is engaged in rendering software development services only. The ld AR also placed reliance on the decision of Delhi Tribunal in the case of Qualcomm India Pvt Ltd vs ACIT in ITA No. 5239/Del/2010 dated 10.6.2013 wherein Akshay Software had been clearly held to be functionally comparable . 6.2. He argued that with the aforesaid exclusions and inclusion of comparables with the list of other comparables chosen by the ld TPO, the assessee s margin would be clearly justified to be at ALP and hence no adjustment need t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B India (P) Ltd vs DCIT reported supra. 6.3.5. The ld AR drew the attention of the order of the ld DRP wherein the assessee had explained the benefits derived by it through increased turnover from the financial years 2004-05 to 2009-10 as below:- Year Revenue derived from Third party customers (including software Sales Maintenance Revenue) Additional benefit derived from third parties due to sale of software Royalty payment to US Benefit Benefit % (on sales) 2004-05 21,681,971 3,510,587 0 25,192,558 100% 2005-06 13,736,036 1,024,860 0 14,760,896 100% 2006-07 34,967,014 565,460 0 35,532,474 100% 2007-08 21,884,197 2,937,000 0 24,821,197 100% 2008-09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty admittedly is paid pursuant to the Royalty agreement entered into with AE and which was also placed before the lower authorities. 6.3.7. The ld AR argued that without prejudice to the aforesaid arguments, assessee had also conducted the benchmarking analysis for the payment of royalty / license fees paid by third parties (licensee) to the licensor for sub licensing of software. The average royalty / license fees details from the benchmarking analysis is given below:- Sl. No. Licensor Licensee Royalty Rate % 1 RAND IMAGINIT Technologies, Inc Autodesk, Inc. 50.00 2. Bit-Arts Limited Smarte Solutions, Inc. 30.00 3. JetForm Corporation Indigo pacific Pty. Ltd. 50.00 4. Infospace, Inc. Mitsui co., Ltd. 40.00 5. Open Solutions Inc. (OSL) BISYS, Inc. 30.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble addition was made due to entity level benchmarking may be directed to be verified to the file of the ld AO. 8. We have heard the rival submissions and perused the materials available on record including the paper books filed by the assessee. There is no dispute on the application of TNMM as the MAM with PLI of Net Cost Plus Margin. The controversy that revolves around us is only on the selection of comparables. First we shall address the dispute on account of Upward Adjustment in respect of sales to AE in the sum of ₹ 74,92,375/-. The assessee chose 15 comparables to justify its transactions with AE to be at Arm s Length. The ld TPO rejected 13 out of 15 comparables of the assessee and included several new comparables and made upward adjustments to ALP. The ld DRP did not give any relief to the assessee on the selection of comparables chosen by the ld TPO. We find that the ld DRP had given relief only on the exclusion of recovery transactions of ₹ 1,37,88,142/-for determining the TP adjustment and granted relief on working capital adjustment and therefore re-calculated the Arm s length margin of ld TPO s comparables at 39.25%. We find that the ld AR before us agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 92CA(3) of the Act. In these circumstances, we find lot of force in the argument of the ld AR that the information available in the public domain i.e the annual report, should be taken as correct. Moreover, we also find that the annual report is being circulated to the larger sections of the public in compliance with the provisions of Companies Act, 1956 and Listed Company regulations prescribed by SEBI. We also find that the co-ordinate benches of various tribunals had held that this company should not be treated as comparable. The recent decision of the Co-ordinate Bench of Hyderabad Tribunal in the case of CNO IT Services (India) Private Limited vs DCIT in ITA No. 336/Hyd/2015 dated 19.2.2016 for Asst Year 2010-11 had held as under:- 6. We have considered the rival submissions and perused the impugned orders of the lower authorities and other material on record. As noted hereinabove, the only grievance of the assessee in this appeal is against the inclusion of the following companies in the list of comparables, for the purposes of determining the Arm s Length Price. (a) E-Infochips Bangalore Ltd (b) Kals Information Systems Ltd (c) Tata Elxsi Ltd (Seg) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d judicial precedent relied upon, we hold that the comparable chosen by ld TPO i.e EInfochips Bangalore Ltd is functionally not comparable with the assessee company. 8.3. Exclusion of Infinite Data Systems Pvt Ltd (Merged) We find that this company had reported NCP of 88.25% . It is not in dispute that the assessee is engaged in software development. Hence comparable should also be in the companies engaged in the similar sector. We find that this company is having a different business model and engaged in providing entire gamut of solutions comprising of technical consulting, design and development of software, maintenance, system integration, implementation, testing and infrastructure management services. We find from the paper book that the revenue is primarily derived from technical support and infrastructure management services. We find that Infinite Data Systems Pvt Ltd commenced its operations on 1st January 2009 and as per segment reporting disclosure, the company s operations predominantly relate to providing software technical consultancy services to its sole customer Fujitsu Services Limited. Further, as per the Annual Report of 2009, at Page 1, it is stated that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the TPO in holding that the fact of amalgamation on the margin of the said company has no effect on the margin of the said company. This, in our opinion, is not a correct approach of the AO. Where a direction has been given by the DRP to follow a certain procedures, the AO has simply followed the TPO order. Therefore, order of the AO on this issue needs to be set aside. In the case of Hyundai Motors India Engg. (P.) Ltd. (2015) 64 taxmann.com 442 (Hyd.-Trib.) which is also engaged in rendering of ITES to its AEs, the Tribunal has taken note of the same at para 9.1 and 9.3 of its order. Therefore, the decision of the Tribunal in the said case is applicable to the case on hand, more particularly since the comparables adopted by the TPO in the said case are the same in the assessee's case also. In the case of Hyundai Motors India Engg. (P.) Ltd. (supra) at Page 20, para 18, the Tribunal has held as under: 18. As regards M/s. Accentia Technologies Ltd., is concerned, we find that the DRP has directed to exclude this company by placing reliance upon the order of the ITAT in the assessee's own case for the A.Y. 2009-10 by holding that this company operates in a differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O/TPO to exclude this company from the final list of comparables. 11. TCS e-Serve International Ltd: As regards the comparability of this company with the assessee, the learned Counsel for the assessee submitted that the TCS international also provides software testing, verification and validation which are different from ITES services providers by the assessee. It is also submitted that the segmental information of TCS International are not available in the annual report. The exceptional circumstances of the company reported in annual report such as acquisition of India based captive business outsourcing arm, resulting in acquisition of an aggregate amount of $ 2.5 billion over a period of 9.5 years and its impact on the financial implications of the company also brought to our notice. It is submitted that these peculiar circumstances have been considered by the Coordinate Bench of this Tribunal in the case of Hyundai Motors India Engg. (P.) Ltd. (supra) for exclusion of the list of comparables. Respectfully following the decision of the Bench, these two comparables TCS e-Serve International Ltd and TCS e-Serve Ltd directed to be excluded. In view of the aforesaid f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We find that this comparable i.e Akshay Software Technologies Ltd had been accepted as comparable in IT sector in the Co-ordinate Bench decision of Delhi Tribunal in the case of Qualcomm India Pvt Ltd vs ACIT in ITA No. 5239/Del/2010 dated 10.6.2013 , wherein it was held that :- 26. On perusal of the order of the Ld. T.P.O. , we find that the Ld. T.P.O. has rejected Akshay Software as a comparable to the assessee for determining the assessee s ALP on the basis that the Akshay Software is functionally different to the assessee. He has observed that Akshay Software is engaged in SAP and remote infrastructure management software applications, as against design work on embodied software, DSP an integrated circuit hardware design and systems and also for the reasons that sales of Akshay Software is only ₹ 6.21 crores against sales of ₹ 125 crores to the assessee. We, however, find that the Ld.T.P.O in the assessment year 2007-08 as it is clear from the TPO order for the said assessment year made available at Page No-69 of the paper book volume 3 , has accepted that Akshay Software is comparable in the light of identical functions. On perusal of profit and loss account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction was aggregated with the provision of software design and development services transaction and benchmarked using TNMM as the Most Appropriate Method. We find that the table mentioned in the arguments of ld AR hereinabove would prove that the assessee had derived benefits of around 90% in terms of additional revenue and minimal / no cost by virtue of paying royalty to its AE. Admittedly, LVS Inc had granted the license to the assessee for which royalty payment has been made, pursuant to which the assessee was able to derive such revenues from third party customers. Hence the argument of the ld AR that under comparable circumstances, no third party would have given such license free of cost or allowed assessee to retain majority share of the revenue, is well founded and deserves to be accepted. It is true that there has been increase in the revenues and profitability post addition of this software sales and maintenance revenue as detailed hereinbelow:- Financial Year Revenues Profit before Tax 2006-07 10,68,45,669 (94,71,976) 2007-08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 9.2. We also find that this issue has been addressed by yet another decision of the Hon ble Delhi High Court in the case of CIT vs Cushman and Wakefield (India) (P) Ltd reported in (2014) 46 taxmann.com 317 (Delhi) vide order dated 23.5.2014 , wherein it was held that the authority of ld TPO is to conduct a transfer pricing analysis to determine ALP and not to determine whether there is a service or not from which assessee benefits and therefore, the ld TPO cannot determine ALP of payments made by assessee to its AE at Nil taking a view that assessee did not derive any benefit from services rendered by AE. 9.3. Hence we hold that the assessee had duly satisfied the benefit test out of payment of royalty to its AE. On that count itself, the deduction of royalty payment does not deserve to get disturbed. 9.4. We also find that the assessee had also conducted the benchmarking analysis for the payment of royalty / license fees paid by third parties (licens ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
