2019 (11) TMI 333 - AT - Income Tax

TP Adjustment - Advertising, Marketing and Promotional ("AMP”) Expenses addition - AMP expenditure as international transactions - HELD THAT:- The assessee who is in the business of distribution of goods manufactured by its foreign controlling parent and did not own any trademark or brand, had performed significant functions like brand development, market development, marketing customer support, technical and administrative support on behalf of its AEs in India bearing cost, investing huge sum and using its skilled manpower and time. These facts clearly prove that the assessee had developed marketing intangible for brand owned and goods manufactured by its foreign AEs by bearing significant cost and risk. Accordingly, the assessee was entitled to get reimbursement of the cost incurred by it and was entitled to retain intangible income in India. All these contentions of both the Ld. AR and Ld. DR has not been taken into account by the TPO/AO which needs to be verified by the Revenue. Therefore, it will be appropriate to remand back this entire issue to the file of the TPO/AO for adjudication on merit as well as in light of the decisions of the Hon’ble High Court and the Special Bench in case of L G Electronics [2013 (6) TMI 217 - ITAT DELHI]

Addition in respect of Software Development Services segment (SDS) - comparable selection - Application of various filters - HELD THAT: - The assessee did not dispute the profit margin in case of on-site work which is normally low as compared to offshore work. In the present year also the TPO demonstrated with facts and figures that there is considerable difference between the average rate per hour in the case of offshore projects vis-à-vis on site projects. The TPO was right in applying the on-site revenue’s filter considering the companies generating more than 75% of their export revenue’s from onsite operation. Therefore, this filter was rightly applied.

As regards to filter relating to employee cost more than 25% of sales and companies falling less than this threshold have been excluded, the said issue is held in favour of the assessee in assessee’s own case for A.Y. 2007-08 wherein it has been held that the employee cost/sales of the assessee is 65% and hence a range of 50% to 80% should be applied instead of the threshold limit of 25% as applied by the TPO - this filter is wrongly applied by the Revenue. Hence we direct the TPO/AO to apply a range of 30% to 60% as it will be most appropriate ratio for the SDS segment.

The companies having diminishing revenue or consistent losses are definitely cannot be compared with the assessee company. Thus, this filter was rightly rejected.

Related party transactions (both income and expenditure) being more than 25% of sales - We direct the TPO to take into consideration only those comparables where related party transactions are to the extent of 15% because it is not the case of revenue that by applying the threshold limit of 15%, it will not get sufficient number of comparables.

Filter relating to Research and Development Sales which is less than/equivalent to 3% (<=3%) were accepted by the assessee

Advertisement, marketing and distribution cost less than/equivalent to (<=) 3% were accepted the Tribunal partly held in favour of the assessee in assessee’s own case for A.Y. 2007-08 and held that application of this filter will have to be seen on a case by case basis.

Denial of economic adjustment for difference in working capital - HELD THAT:- It is pertinent to note that the TPO has given the benefit of working capital adjustment in the previous year and there is no change in the factual aspect in the present assessment year as well.

Inappropriate comparable companies selected by the TPO/AO in respect of Software Development Services Segment - Companies functionality dissimilar with that of assessee's Software Development Services Segment need to be deselected from final list.

Error in margin computation - TPO while computing the adjustment amount in SDS segment has incorrectly taken margin of Assessee as 5 10% instead of 8.22% - HELD THAT:- From the perusal of the records it can be seen that there is error in the margin computation which needs to be verified. Therefore, we remand back this issue to the file of the AO/TPO for verifying the said computation and quantifying the same correctly. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice.

Adjustment made in respect of provision of Administrative support services and market support services segment (MSS) - HELD THAT:- We direct the TPO to take into consideration only those comparables where related party transactions are to the extent of 15% because it is not the case of revenue that by applying the threshold limit of 15%, it will not get sufficient number of comparables.

Marketing Support Services Segment - Companies functionally dissimilar with that of assessee need to be deselected from final list.

Denial of economic adjustment for difference in Risk profile - HELD THAT:- Computation of risk adjustment as per CAPM model by availing the services of technical experts. The experts of the field are to be appointed by both the sides to come to an acceptable conclusion

Addition on account of corporate recharges and reimbursements paid in the nature of “Intra Group services” - HELD THAT:- From the perusal of the records it can be seen that the additional evidences filed before us and before the DRP has a relevance in deciding this issue. The TPO did not have these documentary evidences at the time of deciding, therefore, it will be appropriate to remand back this issue to the file of the TPO/AO for verifying these evidences and taking cognizance in respect of the claim made by the assessee on merit. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice

Disallowance of provision of liquidated damages - HELD THAT:- Clause on liquidated damages clearly fixes amount of liquidated damages in delay and therefore liability of the Assessee to pay accrues immediately upon delay and such liability is fully ascertainable. Thus, provisions made in that respect is allowable

Disallowance of capitalization of software purchases - Nature of expenses - HELD THAT:- DRP has not given any finding on this issue. It is the Assessee’s case that these software expenses do not have a benefit of permanent or enduring nature and, therefore, are not a capital asset. These are only for updating and maintaining the existing software. It is pertinent to note that issue is identical. Therefore it will be appropriate to remand back this issue to the file of the TPO/AO

Disallowance of deduction under section 10A/10B - Assessing Officer rejected this claim on the basis that revised CA certificate was not issued - HELD THAT:- AR submitted before us that in the return of income, the Assessee had also made suo-moto adjustment of ₹ 18.81 Crores on account of ALP for the software segment being lower than TP margin required as per law. Out of the said adjustment of ₹ 18.81 Crores, ₹ 10.16 Crores pertain to the 10A/10B units allocate in proportion to the turnover which is now reflected in the revised CA certificate. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for verifying whether the claim of the assessee is proper or not and adjudicate the same on merit after considering the revised CA certificate. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice