TMI Blog2017 (12) TMI 1117X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount of TDS as per the provision of law Surcharge on DDT - Held that:- On perusal of records, we find that the surcharge applicable for the AY 2011-12 is 7.5%. But it is undisputed fact that dividend was declared and distributed and paid in AY 2012-13 and therefore the surcharge as applicable to the AY 2012-13 i.e. @ 5% should be applied on the DDT. In view of above, we direct the AO to delete the extra surcharge levied on the DDT Addition on AMP expenses as international transaction - Held that:- AMP cannot be regarded as international transaction. In holding so we find the support & guidance from the judgment of Hon’ble Delhi High Court in the case of Maruti Suzuki India Limited Vs. CIT [2015 (12) TMI 634 - DELHI HIGH COURT] Addition on account of lease rental paid for the cars - AO was of the view that the expenditure incurred on lease rental are in the nature of capital expenditure - Held that:- We find that the issu9e under dispute is covered by the decision of the Hon'ble Supreme Court in the case of ICDS Ltd [2013 (1) TMI 344 - SUPREME COURT ] decided in favour of the assessee Addition on account of waiver of loan - Held that:- We note the loan amount was ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of ₹ 2,027,159,953 to the Arm's Length Price (hereinafter referred as ALP') of the international transaction relating to Management Support Services received by the Appellant and in not accepting the ALP of the international transaction as recorded in the books of account of the Appellant: 2.2 Concluding the ALP for services provided by the Associated Enterprise AE') to the Appellant under the Management Support Services agreement to be Nil; 2.3 Concluding that the services received by PIL from the AE are in the nature of stewardship and shareholder services leading to direct benefit to the AE and no proximate benefit to the Appellant; 2.4 Completely disregarding the benefits received by the Appellant on receipt of such management services and not appreciating that such services have significantly assisted the Appellant in achieving its daily operational efficacy; 2.5 Completely ignoring the fact that the voluminous tangible evidences furnished during the assessment proceedings unambiguously demonstrate regular flow of services received by the Appellant and how such services significantly helped PIL's daily operations; 2.6 Not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts made for management support services and IT services by the Appellant in the year under appeal without appreciating that the same have been accepted to be at arm's length in the Appellant's own case in preceding years (i.e. for all the assessment years preceding to AY 2009-10) by the AO and the TPO. 4.2 The Learned TPO erred in not applying the rule of consistency to transfer pricing proceedings when the facts of the case including the underlying arguments have not altered. 5. Determination of arm's length price for Software Segment 5.1. The Learned AO, TPO and DRP erred in making an adjustment to the ALP of international transactions relating to software development services rendered by the Appellant and in not accepting the ALP of the international transaction as recorded in the books of account by the Appellant. 5.2. Without prejudice to the generality of the above, the Learned AO and the DRP erred in making a transfer pricing adjustment of ₹ 16,27,69,727 on the basis that the Appellant should have made operating profit/ total cost margin of 15.36 % with respect to its software development services. 5.3. The Learned AO and DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 130 instead of ₹ 4,84,89,927, thereby resulting in short grant of credit of ₹ 1,13,24,797. 9. Interest under section 234A 9.1. The Learned AO erred in levying interest of ₹ 1,35,46,528 under section 234A of the Act. 10. Interest under section 234B 10.1 The Learned AO erred in levying interest of ₹ 39,96,22,576 under section 234B of the Act. 11. Interest under section 234D 11.1. The Learned AO erred in levying interest of ₹ 1,61,67,498 under section 234D of the Act. 12. Interest under section 244A 12.1. The Learned AO erred in recovering interest of ₹ 42,39,613 under section 244A of the Act. 13. Penalty u/s 271(1)(c) 13.1. The Learned AO erred in initiating penalty proceedings under section 271 (1)(c) of the Act. 14. Dividend Distribution Tax 14.1 The learned AO erred in wrongly computing additional tax and interest payable on distributed profit of ₹ 4,44,320 without assigning any reason thereto. The appellant submits that the above grounds are independent and without prejudice to one another. The appellant desires leave to add or to alter, by deletion, subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lating to the distribution function are in compliance with the arm s length principle Software Philips Software Centre (PSC) is an offshore software development centre established to meet the need for in-house software development and software services to KPNV Group based on specifications provided. In the benchmarking study of the software division the assessee characterized the division as in-house service provided with limited functions and limited risk and receiving remuneration for services rendered based on cost plus mark-u. Assessee selected TNMM as the most appropriate method. A search was conducted by using Prowess and Capitalines Plus databases for software services. 5. The assessee during the year under consideration entered into various transactions with it AE which were accepted by the TPO except the following:- 1. Payment on account of Management support services 2. Payment on account of IT Charges 3. AMP expenses 4. Rendering software development charges The Ground No. 1 raised by the assessee is general in nature and does not require any adjudication. 6. The second issue raised by the assessee is that the ld. DRP erred in making an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to its premises to the extent to which Philips has the free right to do so, so that they can acquaint themselves with commercial and other knowledge as specified above, familiarize themselves with the organisation of the Philips concern and with working methods used by it or receive advice on specific matters in the fields described above; and h. Any other similar matters which the company may reasonably refer to Philips or which Philips itself may deem appropriate. It has been agreed that the services mentioned above would be rendered by Philips to the company outside the country. Any services that would be required to be rendered by Philips in or within the country, whether by way of deputation of employees / representatives or otherwise, would be mutually agreed amongst the parties hereto and the same would not form part of this agreement. It was also agreed in the agreement that the assessee for the aforesaid services shall pay the remuneration to its parent company as detailed under:- Article-4 Remuneration In consideration of the concern services rendered by Philips under this Agreement the Company agrees to pay to Philips remuneration by aggregating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es; In respect of the cost allocations the assessee highlighted the following facts: * The AE used the same pricing method for earlier years also and the same pricing mechanism is followed for other group entities as well; * The AE has not charged for shareholder services; * The centralization of costs result in significant group cost savings which the assessee has also benefitted from; * It was difficult for the assessee to engage a third party for providing similar high level services; * The services rendered by the AE are of high quality; * The assessee did not have sufficient in house resources to provide services similar to those received from the AE; * Services received by the assessee enabled it to carry out its business operations more efficiently in an increasingly globalized and competitive scenario; * Access to such services enabled the assessee to keep up with customers expectation. Also the assessee filed GSA TP documentation, wherein the mark-up of 10% was benchmarked and the same was also proved to be at arm s length. Further, it was also demonstrated that due to the continued support being received by the assessee, the turnover of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices from a Pan Asia independent company. Further, OECD guidelines on transfer pricing mention in Para 1.57 1.58 that geographical location is important for comparability as follows:- 1.57 The geographic market is another economic circumstances that can affect comparability. The identification of the relevant market is a factual question 1.58. In cases where similar controlled transactions are carried out by an MNE group in several countries and where the economic circumstances in these countries are in effect reasonably homogeneous, it may be appropriate for this MNE group to rely on a multiple country comparability analysis to support its transfer pricing policy towards this group of countries . Further, it is important to note that worldwide the Tax au9thorities accept the same geography in which the company which is receiving the services is operating. Otherwise, they tend to question the rationale of availing services from outside the geography of the services recipient. Hence, the assessee used Pan Asian comparables to justify the cost plus markup being charged by the AE is within the range as being charged by a Pan Asian independent company and there is no lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failed perceive the benefits accruing to it from such services provided by the AEs to the Indian entity i.e. the A'. The Panel considered the rival submissions in the above regard. The paper books filed the A' were meticulously gone through by us. The evidence on record in respect of appearing at pages 1 to 56 of the volume 1 of part 3 (Exhibit 2 of DRP submission) were carefully considered and analysed by us to properly appreciate the merits of the claim. The discussion made by the TPO on pages 132 to 232 of his order under challenge was also carefully perused and analysed vis-a-vis the submissions made by the A' on pages 893 to 907 of the paper book volume 2. The relevant agreements enclosed in respect of the various services filed with the paper book were also studied in depth (pages 982 to 991 of the paper book). The bills raised in lieu of the services enclosed on sample basis on pages 992 to 1005 of the same paper book were also perused. Before delving into the merits or otherwise of the objections of the A' as above the Panel feels tempted to refer to the essential ingredients which result in Stewardship activity : - 1) The parent company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment made for the same. 10. Evidence of benchmarking analysis undertaken at the time of entering into agreement so as to compare the payment of IGs to the AEs vis-a-vis independent party under similar circumstances. 11. What tangible and direct benefit was derived by the A'. 12. Whether services availed of from AEs have also been performed by the A' itself or from independent parties. 13. Details of such expenditure for each of the services. 14. Why a separate payment was made for the services to the AE. 15. Documentary evidence of cost incurred by the AE for rendering each type services purportedly received by the A' and the mark up applied, if any by the AE? 16. Whether the cost incurred by the AE was audited? 17. Whether AE was rendering services to any other AEs / independent parties also. If, so, the details thereof including the rates / amount Costs charged from such A Es along with mark up if any? 18. Whether the AE rendered services to any other AE / independent parties also. 19. Whether the AE rendered services to more than one entity including the company, then the basis of allocation amongst various entities and the basis cho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts, bills and emails, it was clear that the services did not answer the requirements as per (a) to (f) supra. Accordingly it is held by the Panel that the services were of duplicative nature which no independent party would be willing to avail of at a price. The basis of evaluation of each service and the proof of actual receipt of such services along with the benefit were also not there. When and how the services referred to in the bills and the agreements were requisitioned by the A' from its AE's were also not clear. Similarly the cost benefit analysis undertaken by the A' and the expected benefits were also not available on record. Thus in a nutshell the 19 angles from which the case of the A' was examined did not go to establish that the services received by the A' from its AE were not in relation to day to day management of the business operations of the A', that the services were not aimed at monitoring the performance of the A' and that they enhanced the economic and commercial value of the A'. Accordingly the grounds 2 3 with its sub grounds are dismissed. Aggrieved, by this, the assessee has come up in appeal before us. 9. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the audit exercise respectively The test for an intra-group service generally involves examination of the following factors: The nature of activities; The associated need and benefits; Documentary evidence in support of the transaction; The charge-out mechanism; and The ALP of the transaction. Nature of activities In Transfer Pricing's context, it is essential to draw a line of distinction between a business activity and a service. Essentially the guiding principle that goes in determining the existence of an intra-group service is whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. An in-depth analysis, following the aforementioned conceptual difference between business activities and services, clears the air on many common business activities erroneously perceived to be in the nature of intra-group services. This includes: Activities without any benefit: any activity which does not lead to an incremental commercial or economic value addition for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and passive association benefits, therefore the Transfer Pricing Officer had rightly adopted nil value as the ALP. Activities leading to duplication of benefits: A third party would never make payment for receiving the same service twice since the incremental benefit is lost. Keeping this in mind, an activity leading to duplication of benefits cannot be construed as a service and therefore does not require any remuneration. Surmising the above, for an activity to qualify as a service, the fundamental factor that need to be considered is: Whether an independent enterprise would have been willing to pay for the activity; or Whether an independent enterprise would have performed the activity in-house itself. Evaluating the needs and benefits of Intra-group services It involves identifying the incremental economic or commercial value that has arisen to the services recipient. A direct nexus between the services received and the corresponding value created should be established. An intra-group service should be analysed to see how it helps the service recipient make gains through increased profitability be it by increasing sales or by reducing costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the third party costs. It is advisable that the service agreement contains a clause providing the parameters of the measuring the expected benefits and linking the charges to such benefits. Such an arrangement help in establishing the cost benefit nexus before the Indian Revenue. * Cost benefit analysis: Details of cost benefit analysis, if any undertaken at the time of entering into the agreement. Third party quotes for similar services if arranged for at the time of entering into the agreement, should also be made available * Functional analysis: The functional analysis should cover all basic questions like: * Who is doing what and for whom; * Where are they doing it; * Why are they doing it; * Who are they doing it; * What property is being used or transferred in connection therewith; * Benefit test documentation: Services may be received by way of conference calls, occasional visits and mails / presentations / tool kits exchanged from time to time. The actual evidence of receipt of services can be established with the help of the policies / e mails / guidelines / presentations used during the rendition of services. In addition to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices. Presentation / reports containing benefits obtained from having a centralised information technology function in terms of cost saving and economics of scale; Screenshots / emails showing IT services actually being received (troubleshooting problems, creation of logins for employees); Third party invoices raised on the service provider and agreements for the services and software licenses procured; Human resource and training Email invitation and attendance sheet of the employees attending the training programme; Documents depicting any review of employment contracts by the service provider on behalf of recipient; Reports demonstrating benefits of a centralized human resource system like lowering of attrition rate, lesser personnel employed in the human function than required, people survey results. Before proceeding with determining the ALP, it is essential to establish the charge-out mechanism for the intra-group services rendered. For this, it is essential to distinguish between services that benefit a particular affiliate directly and services that benefit several affiliates or the group as a whole. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r benefits have accrued and the arm's length test. High Court held that the powers of the TPO is limited to determination of ALP, however the TPO may determine the arm's length price as nil in situations where an independent entity in a comparable transaction would not pay any amount. In the case of Deloitte Consulting India (P) Ltd. vs. DCIT [2012] 150 TTJ 824 (Mumbai) the tribunal on the issue as to whether the TPO was empowered to determine the ALP at nil, held that the taxpayer had to establish before the TPO that the payments made were commensurate to the volume and quality of the service and that such costs were comparable. The Tribunal further held that when commensurate benefit against the payment of service is not derived, the TPO is justified in making an adjustment under ALP. The Tribunal had determined the ALP at nil keeping the factual position as to whether in a comparable case, similar payment would have been made or not in terms of the agreements Similarly, in the cases of M/s Knorr-Bremse India Pvt. Ltd vs ACIT and Gemplus India (P.) Ltd vs ACIT, discussed above, the payments made in congruence of intra-group service arrangement were disallowed by determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h knowhow, expertise and experience in the aforesaid areas as Philips now and in the future may possess and may freely and unconditionally furnish to the Company, and render assistance in this connection, all to the extent reasonably required to improve the Company s business operation. The assistance may relate to : a. the distribution and trading of products, particularly with respect to advertising, sales promotion, public relations, market research (in particular, information and trends on the world market), labeling, packaging, shipping and forwarding, long-term export business and international public tendering and purchasing from Third parties; b. advice and support with respect to the supply of requirements of the Company from other resources ; c. financial, accounting and auditing matters relating to such subjects as: i. accounting and auditing principles and methods; ii. budgeting methods; iii. capital structure, loans, exchange risks, financial research, warranties and guarantees, credit management, the establishment and management of finance and lease companies and all further banking activities, including longterm finance plans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution activities. 4.2. We find that no adjustment on account of Management Support Service Charges were made in the past by the revenue from Asst Years 2005-06 to 2008-09 though the agreement is effective from 22.10.2004 onwards. We also find that Article 6 of MSSA enclosed in page 294 of the Paper Book on Taxes is as under:- The costs, taxes, stamp duties and similar charges arising out of this agreement shall be borne by the Company (assessee) if such amounts are due in the Country, and by Philips if such amounts are due outside the Country with the exception of : a. taxes which can be claimed back or credited against tax by the Company in accordance with the legal provisions which shall be chargeable to the Company; and b. taxes which can be claimed back or credited against tax by Philips in accordance with the legal provisions, which shall be chargeable to Philips. The ld AR argued that the assessee had complied with the TDS obligations on the subject mentioned payments and the same has been accepted by the department. He also referred to the summary of emails from Pages 333 to 378 and further emails which are enclosed in Exhibit II from pages 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... personnel, which will enable the personnel to fulfill such specialized tasks on their own. Therefore the assessee s claim of not fulfilling the make available condition is rejected. The ld DRP in para 39 of the said order (enclosed in page 1040 of paper book) had further held that the consideration of all these facts leads to the conclusion that the deliverables under the MSSA are predominantly in the form of commercial knowhow and not commercial services and therefore covered by the definition of the term Royalty under Article 12 of the DTAA. 4.3.3.4. From the above it would be clear that the receipts in respect of MSSA would be taxable either as FTS (to the extent they are services rendered) or Royalty (to the extent it is providing commercial know-how or commercial experience). As both FTS and Royalty are taxable at the same rate under the DTAA, it does not matter that there is no clear cut separation or quantification in the MSSA of the service and the knowhow portions. The entire receipts would be chargeable to tax in India under the DTAA as well as the I.T.Act. 4.2.1. Hence based on the aforesaid order of ld DRP in the hands of KPENV for the Asst Year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from FY 2004-05 onwards (i.e., first year of receipt of management support services) 6 March 2006 23829 56% Subsequent years in which Management support services continued to be received by the Assessee 7 March 2007 22790 49% 8 March 2008 27621 80% 9 March 2009 28645 87% 10 March 2010 31162 104% 11 March 2011 34267 124% 4.5. In the instant case, we are convinced that the assessee had indeed received the services from KPENV which fact is also acknowledged by the ld DRP in the hands of KPENV as stated supra. The benefits derived by the assessee out of these services by way of substantial cost reduction and increase in turnover substantially cannot be swept under the carpet. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot - as the Income-tax Appellate Tribunal correctly surmised-be duplicated in India insofar as they require interaction abroad. Whether it is commercially prudent or not to employ outsiders to conduct this activity is a matter that lies within the assessee's exclusive domain, and cannot be second- guessed by the Revenue. [brackets provided by us] 4.7. We also find that the decision relied upon by the ld AR on the coordinate bench of this tribunal in the case of DCIT vs Bata India Ltd reported in (2016) 69 taxmann.com 120 (Kolkata Trib) dated 6.4.2016 had considered the decisions of Hon ble Delhi High Court in the case of CIT vs EKL Appliances Ltd (2012) 345 ITR 241 (Del) ; CIT vs Cushman Wakefield (India) (P) Ltd (2014) 367 ITR 730 (Del) and co-ordinate bench of Mumbai Tribunal in the case of Dresser Rand India (P) Ltd vs Addl CIT (2011) 47 SOT 423 (Mum) and applied the principles emanating out of those judgements and applied the same to the facts of the case in Bata India Ltd. In the said case (i.e Bata India Ltd supra) it was observed as under:- 27. The Hon'ble High Court of Delhi in the case of CIT v. EKL Appliances Ltd.[2012] 345 ITR 241/24 taxman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the principles emanating from the aforesaid decisions, we shall now proceed to examine the material on record to see the nature of services received by the Assessee and as to whether the same were at Arm's Length. 47. In the light of the discussion in paragraphs 30 to 46, We hold that the Assessee has established the nature of services including quantum of services received by the related party, that services were provided in order to meet specific need of the Assessee for such services, the economic and commercial benefits derived by the Assessee of intragroup services. 4.8. We also find that in the recent decision of the Hon ble Delhi High Court in the case of Knorr-Bremse India (P) Ltd vs ACIT reported in (2016) 380 ITR 307 (Del) wherein the relevant head notes is reproduced herein below :- Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm s length price (Comparables and adjustments/Adjustments - General) - Assessment year 2007-08 - Whether answer to issue whether a transaction is at an arm's length price or not is not dependent on whether transaction results in an increase in assessee's profit; mere failure to esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and servers residing in EMI forests. It provides number of system management functions such s inventory, software distribution, reporting remote assistance for Wintel clients services. (refer page 57-58 of Volume 1 Part-1-DRP submission) * DIAMOND Basic DIAMOND is a companywide electronic messaging and application hosting environment that supports a number of collaboration and application services lie email. It includes email, directory, calendaring scheduling, virus scanning, mail file restore, spam filtering etc. (refer page 58-59 of Volume 1 part 1-DRP submission) * IP Service IP Services provide the Philips community with private wide area IP network dedicated to supporting Philips business. It is an internally open network providing IP communication between all Philips locations connected to the Philips Global network. The IP services covers 3 parts IP transport services, IP address space management services and DNS backbone service. The IP service enables transparent, end-to-end communications for services such as file transfer, transaction processes and electronic mail. (Refer page 60 Volume 1 Prt-1 DRP submission.) * Philips Email to Applications Connecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so to get the benefit of economics of scale. Further, the assessee did not have resources and expertise to develop he applications on its own which are required for its efficient functioning. Moreover, it is business decision to have such services globally sourced rather than locally procured. However the TPO disregarded the contentions of the assessee and held that the services received by the assessee from the AE are in the nature of stewardship services leading to direct and proximate benefit to the AE. Accordingly the TPO determined the arms length price for Information Technology (IT) services provided by the AE to the assessee to be Nil. Thus, the TPO proposed an adjustment to the tune of ₹ 35,526,652/- and added to the total income of the assessee. 13. Aggrieved assessee preferred an appeal to ld. DRP wherein it was submitted that during the course of transfer pricing assessment proceedings, all the Service Level Agreements (SLA) entered with its AE were filed to the TPO. Besides sample copies of the invoices received from the AE were also filed. It was also reiterated that the IT services provided by the AE were integral to the business of the assessee and were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciple of consistency should be applied in the instant case. In this connection we are relying on the decision of Hon ble Supreme Court in the case of Radhasoami Satsang vs. Commissioner of Income Tax (1992) 193 ITR 0321 (SC) We are aware of the fact that, strictly speaking, res judicata does not apply to IT proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. One these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter-and, if there was no change, it was in support of the assessee-we do not think the question should have been reopened and contrary to what had been decided by the CIT in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled a bona fide TP documentation as prescribed in Rule 10D of the Income Tax Rules, 1962 in support of his claim. The assessee selected certain companies for the purpose of comparisons to determine the ALP as detailed under : Philips Software Center Annexure 4 Search for Software Services Transfer Pricing Study-(2010-2011) Margin Summary of comparable companies Amount in Cr. Sr . Name of the company Type of Accounts Operating profit Operating cost Operating margin (%) Weight average operating margin on 2009 201 0 2011 2009 2010 2011 2009 2010 2011 operating cost (%) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18.40% 21.09% 9 VMF Soft Tech Ltd Standalone (1.06 ) 0.18 (3.56) 1.97 0.77 - 53.72 % 23.41% -84.06% -63.68% Arithmetical mean -4.15% -0.52% Maximum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bells Softech Ltd 12.97% -16.32% -16.95% 1.11% CGVAK Software Export Ltd (Seg) 5.47% -9.96% 4.98% 0.37% Evoke Technologies Ltd 19.93% 18.29% 8.11% 14.69% I Power Solution India Ltd 1.21% 4.73% 2.86% 2.67% Kaashyap Technologies Ltd -3.95% 6.45% 5.36% 1.62% Melstar Information Technologies Ltd -7.60% NC 3.44% -1.52% Persistent Systems Ltd.# 11.76% 24.69% 20.46% 18.93% Spry Resources India Pvt. Ltd 17.19% 33.22% 18.40% 21.09% VMF Softech Lt -53.72% 23.41% -8406% -63.68% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kaashyap Technologies Ltd -3.95% 6.45% 5.36% 1.62% Melstar Information Technologies Ltd -7.60% NC 3.44% -1.52% Persistent Systems Ltd.# 11.76% 24.69% 20.46% 18.93% Spry Resources India Pvt. Ltd 17.19% 33.22% 18.40% 21.09% VMF Softech Lt -53.72% 23.41% -8406% -63.68% Arithmetical Mean (average) (-) 0.52% # - Common comparable 18.1. Notwithstanding the arguments provided above, the assessee submits that the computation of the margins provided by the TPO is erroneous. Notwithstanding the arguments provide above, the assessee submits that the computation of margins for 3 companies provided by the TPO in the final order is erroneous. The correct margins as submitted befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovide working capital adjustments as directed by the learned DRP. On the other hand the grievances of the Revenue are also two folds. (1) The ld. DRP erred in directing to include certain companies for the purpose of comparables. (2) The ld. DRP erred in admitting the fresh companies for the purpose of comparables. First we take up assessee appeal ITA No. 539/Kol/2016 The ld. AR before us submitted that the following companies cannot be selected for the purpose of comparable. 1. E- Infochips Ltd. (a) Functionally not comparable E-Infochips is engaged in diversified activities as it has income from software development, hardware maintenance, and IT consultancy. Further the Annual Report (AR) mentions that the company is engaged in software development and It enabled services * products. Also the company is engaged in manufacturing trading of PCB. (b) Segmental information not available as per the AR, it is proclaimed that it is engaged in Software development and it enabled services and products. However, segmental information in relation to such activities is not provided in the AR (c) Engaged in R D activities Further the company is also involved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquisitions during the year Separate charts to be seen for detailed arguments case laws. Similarly the ld. AR submitted that correct margin was not computed in case of Persistent Systems Solutions Limited. The ld. AR also submitted that the working capital adjustments should be given by the TPO as directed by the learned DRP. The learned AR in support of his claim also submitted that the Hon ble ITAT in the own case of the assessee in ITA 1068/Kol/2015 for the assessment year 2006-07 has allowed working capital adjustments by 2%. The ld. AR also submitted that the variation of 5% from the arithmetic mean should be allowed to the assessee. On the other hand the ld. DR submitted that the 3 companies selected by the ld. DRP were showing similar functions and profitability therefore the same should be retained. The ld. DR vehemently supported the order of ld. DRP. Now we take up Revenue appeal ITA No. 863/Kol/2016 19. The ld. DR submitted that the companies selected by the TPO during the assessment proceedings were showing similar functions and profitability to the assessee. Therefore the same should be retained for the purpose of the comparables to determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le DRP in their directions had rightly rejected L T by stating that it has intangibles for its propriety products services etc. Accordingly, the contentions of the assessee against L T is reproduced as under:- (a) Functionally not comparable Larsen Toubro Infotech is not functionally comparable as it is engage in both software services and software products. (b) Segmental information not available The company does not have segmental information in their AR (c) Owns Intangibles the company owns intangibles for its proprietary products and services developed. It also owns Brand, (d) Acquisitions during the year The company has also undertaken acquisitions during the year. Separate charts to be seen for detailed arguments case laws. 4. Sasken Communication Technologies Ltd. (Sasken) _ The Hon'ble DRP in their directions had rightly rejected Sasken by stating that the company is also engaged in ITeS which had outsourced its services unlike the assessee. Accordingly, the contentions of the assessee against Sasken is reproduced as under:- (a) Rejected by DRP in AY 2012-13 The company was also rejected by DRP in Assessment Year 2010-11 and AY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DRP in their directions had rightly accepted CG-Vak by stating that the comparable is engaged mainly into software development. TNMM is a more tolerant method. Enterprises may have a wide range of GP margins but still earn broadly similar level of profits, hence accepted. Accordingly, the submissions of the assessee with respect to CG- Vak is reproduced as under:- (a) Functionally comparable CG Vak is functionally comparable as it is engaged in providing customized software development services, software testing services, software consulting services, etc. The company is operating its business through two segment Software services and BPO services. Further the software service business segment has been considered comparable for the purpose of this analysis. 8. Evoke Technologies Pvt. Ltd. (Evoke )- The Hon'ble DRP in their directions had rightly accepted Evoke by stating that the comparable is engaged mainly into software development. TNMM is a more tolerant method. Enterprises may have a wide range of GP margins but still earn broadly similar level of profits, hence accepted. (a) Functionally comparable:- Evoke is functionally comparable as it is derives its revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is placed on page 481 of the PB which reads as under: Persistent Systems Solutions Ltd Computation of Net Cost Profit margin Particulars Amount (in Rs) Page Revenues 189,490,457.00 Pg 53 AR 2011 Operating income 189,490,457.00 Personnel expenses Operating Other expenses 150,781,722.00 Pg 53 AR 2011 Depreciation Amortization 12,570,870.00 Pg 53 AR 2011 Operating expenditure 163,352,592.00 Operating profit 26,137,865.00 OP/OC 16.00% Reconciliation Add: Other income 418,608.00 Pg 53 AR 2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the selection of comparable companies. Therefore we are not inclined to adjudicate the issue of the assessee for claiming the benefit of variation of 5% from the arithmetic mean and the same becomes infructuous. Thus the grounds of appeal of the Revenue are dismissed and the grounds of appeal of the assessee are allowed. 22. Next inter-related issue raised by assessee in ground No.7 to 7.3 is that Ld. DRP erred in allowing depreciation on moulds @ 15% though it is eligible for depreciation @ 30%. 23. The AO during the course of assessment proceedings observed that assessee has claimed depreciation @ 30% on moulds instead of 15%. The AO further observed that the assessee is engaged in business of manufacturing, selling and trading of electronics and electrical products, electronic medical equipments and development of software services. Therefore, the assessee is entitled to claim depreciation @ 15% on moulds. 24. The depreciation on moulds 30% is available to the assessee if these are used exclusively in rubber and plastic industries. As such, assessee had no plastic factory. Therefore, the assessee is not entitled for depreciation @ 30% on moulds. Accordingly, AO disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plastic factory. The view taken by the AO was subsequently confirmed by the Ld. DRP. Now the issue before us arose whether assessee is eligible for depreciation on moulds at higher rate in the given facts and circumstances. It is undisputed fact that assessee has been claiming depreciation on moulds @ 30% in all the earlier years which was granted by the Revenue and no dispute with regard to rate of depreciation arose in the earlier years despite the fact that the assessments for earlier years were framed u/s 143(3) of the Act. In this regard we observe that the assessee was allowed depreciation at higher rate in all the earlier years and no disallowance was made on account of this. However we note that similar disallowance was also made by the ld. DRP for the AY 2012-13 2013-14. The ld. AR before us has also not brought anything on record evidencing that the assessee had plastic factory. The ld. AR has just verbally submitted that in most of the products which are manufactured by the assessee are made up of plastic product which appears to be true. But as such no documentary evidence was filed in support of the assessee claim. However in the interest of justice fair play, we a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was declared and distributed and paid in AY 2012-13 and therefore the surcharge as applicable to the AY 2012-13 i.e. @ 5% should be applied on the DDT. In view of above, we direct the AO to delete the extra surcharge levied on the DDT. Consequently, ground raised by assessee is allowed. 36. In the result, assessee s appeal is allowed for statistical purpose. Coming to Revenue Appeal 863/Kol/2016 37. Revenue s raised the following grounds:- 1. Whether on the fact and in the circumstances of the instant case, the Ld. DRP has erred in directing exclusion to revise AMP adjustment following Delhi High Court order in the case of Sony Ericsson case, when the Delhi High Court is not a jurisdictional High Court in this instant case. 2. Whether on the facts and in the circumstances of the instant case, the Ld. DRP s direction on the issue of AMP adjustment, is within its jurisdiction since it tantamount to fresh Transfer pricing proceedings, akin to set aside of assessment, and also in violation of Sec. 144C(13) of the Income Tax Act 1961. 3. Whether on the facts and in the circumstances of the instant case, the Ld. DRP has erred in incorporate certain compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... * AMP expenses incurred by the assessee were in respect of its own business requirements /considerations / purposes and was not rendered on behalf of the AE; * AMP expense does not constitute an international transaction * The AMP expenses are already factored in TNMM in the distribution segments and hence the same are not required to be evaluated separately; * The business and pricing model of the assessee in relation to its distribution activities should be evaluated before concluding applicability of the Special Bench Ruling of LG Electronics; * Where the Indian entity has been adequately and properly compensated for incurring such expenditure; no separate TP adjustment is warranted; * Application of Bright Line Test (BLT) is not in consonance with Indian Transfer Pricing Regulations; * Without prejudice to the above, even if BLT is applied a proper comparable set is important to establish the BLT. However, the TPO rejected the assessee s claim and held that excess of AMP expense incurred by the assessee is service rendered by the assessee for promoting the brand on behalf of its AE and hence categorized the same as deemed international transaction u/s 92B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... An income arising from an international transaction shall be computed having regard to the arm s length price. [emphasis supplied] As per the above, the primary section i.e. Section 92(1) of the Act limits arm s length analysis to international transactions. Further, Section 92(B)(1) of the Act defines the term international transaction in the following manner: For the purpose of this section and section 92,92D and 92E, international transactions means a transaction between two or more associated enterprises either or both of whom are non-residents, in the nature of Section 92B(1) defines the term international transaction to mean transaction(s) between associated enterprises . In this regard it is noted that section 92B(2) of the Act, extends the scope of Section 92B(1) by introducing a deeming fiction with regard to international transactions to include transaction(s) between an unrelated entity and the assessee resulting from the existence of a prior arrangement between the AE of the assessee and such unrelated entity. 40.1 From the above, it is evident that the purview of Section 92 is limited to only such transactions that are either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground to disallow the claim of the assessee, once it is established that the expenditure in question has been incurred by the assessee for the purpose of business of the assessee inasmuch as the expenditure by the assessee on advertisement / sales promotion has direct nexus with the earning of income by the assessee. In Nestle s case the Hon'ble ITAT has held that AMP expense incurred by the assessee for promotion of its own products in its own territory, albeit carrying the brand name of an AE, is not amenable to the provisions of section 92 and has also not in violation of the requirements of section 37(1) of the Act. In light of the above compelling arguments, facts and available judicial precedence, it is hereby submitted that holding the excessive AMP expenses as international transactions is not in consonance with the Indian transfer pricing regulation and is bad in law. The AMP expenses are already factored in TNMM and hence the same are not required to be evaluated separately. 41. The assessee reiterated that it has benchmarked the segments based on TNMM. In doing so the assessee has incorporated all the costs in connection with its distribution segments i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxpayer is a part of Luxottica group which is in the business of design, manufacture and distribution of sunglasses and prescription frames in mid and premium price, categories. The taxpayer is engaged in trading and distribution of the group products in India. For the Assessment Year (AY) 2012-13, with respect to the international transaction pertaining to its trading activity, that is, import of finished goods, the taxpayer has applied Resale Price Method (RPM) for benchmarking purposes. Notably, the taxpayer has incurred a significant AMP expenditure in proportion to its sales revenue. The Transfer Pricing Officer (TPO) evaluated the significant AMP expenditure incurred by the taxpayer and opined that the excessive promotional efforts or expenditure incurred by the taxpayer was in essence a 'marketing function' carried out by the taxpayer on behalf of its AE and it enhanced the value of the 'Luxottica' brand owned by its AE. The TPO analysed the need to make an adjustment to the operating margins of comparable companies vis-a-vis the taxpayer to factor in the difference in the intensities of AMP expenditure of the comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions so as to attract the provisions of transfer pricing of the Income Tax Act. The claim of the ld. AR is that the AMP transaction does not represent the international transaction between the AE s therefore no question of determining the ALP of AMP transactions. We find force in the argument of the ld. AR in the given facts circumstances. Therefore, in our considered view the AMP cannot be regarded as international transaction. In holding so we find the support guidance from the judgment of Hon ble Delhi High Court in the case of Maruti Suzuki India Limited Vs. CIT reported in 381 ITR 117 wherein it was held as under : 51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson Mobile Communications India (P.) Ltd. case (supra) holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Eric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espectfully following the same, we confirm the order of Ld. DRP and Revenue s ground is dismissed. 51. Last issue raised by Revenue in ground No.8 is that Ld. DRP erred in deleting the addition made by the AO for ₹2,23,60,000/- on account of waiver of loan. 52. The assessee, during the year has credited its profit and loss account on account of waiver of loan for ₹2,23,68,000/-. The assessee in computation of income has reduced the amount of loan waived from its total income on the ground that it is not taxable. However, AO was of the view that the impugned amount falls within the provision of clause (iv) of Section 28 of the Act and therefore it is liable to be taxed and accordingly, AO added the same to the total income of assessee. 53. Aggrieved, assessee preferred an appeal before Ld. DRP who deleted the addition made by AO. The Revenue, being aggrieved, is in appeal before us. 54. Before us both parties relied on the order of Authorities Below as favourable to them. 55. We have heard the rival submissions and perused the materials available on record. It is undisputed fact that the loan was taken by the assessee through cheque/cash. Thus the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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