TMI Blog2015 (11) TMI 1508X X X X Extracts X X X X X X X X Extracts X X X X ..... - SMT DIVA SINGH, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For the Appellant: Sh.Deepak Chopra, Adv., Sh. Aditya Gupta, Adv. Ms. Ananya Kapoor, Adv. For the Respondent: Sh.Amrendra Kumar, CIT.DR ORDER PER DIVA SINGH, JM By the present appeals the assessee assails the correctness of the separate orders dated 10.10.2013 and 24.12.2014 of CIT(A), New Delhi pertaining to 2009-10 2010-11 assessment years respectively. Both these appeals are being decided by a common order for the sake of convenience. ITA No.6161/Del/2013 2. Although various grounds have been raised by the assessee in the appeal filed however at the time of hearing, Ld. AR inviting attention to the grounds originally raised and relying upon the chart summing up the issues and the synopsis filed submitted that the assessee would be agitating for relief only on the following grounds in the appeal:- 1. The Assessing Officer ( AO )/ Dispute Resolution Panel ( DRP ) /Transfer Pricing Officer [TPO) has erred in making an addition of ₹ 45,525,896 to the total income of the appellant on account of various transfer pricing adjustments. 2. The AO/DRP has er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceedings are highlighted by Ground Nos.10, 11 and 14 to 17. 4. Before we address the arguments of the parties in the context of the above grounds, we propose first to refer to certain facts on record. A perusal of the record shows that the assessee is a wholly owned subsidiary of Bentley Systems Inc. (Bentley Inc.) Incorporated USA, Bentley USA. Bentely India was established as the sales and distribution entity for Bentley USA s products in the Indian market. A perusal of the synopsis filed in the present proceedings shows that the assessee also claims on the basis of its transfer pricing study (specific pages 276 to 387 of the paper Book filed) that it was providing low end software development testing and quality assurance services to Bentley USA. The assessee in the year under consideration returned an income of ₹ 4,47,76,639/- by e-filing its return on 29.09.2009. The said return was subsequently revised by returning an income of ₹ 5,31,25,920/-. The return was processed u/s 143(1). After issuance of notice u/s 143(2)/142(1) etc. the assessment was closed at an income of ₹ 9,81,51,816/- consequent to the additions made on account of arm s length price o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces 10,54,94,286 11,30,61,279 75,66,993 Total 4,55,25,896 5. The issue was carried in appeal before the DRP wherein part relief was given to the assessee as would be discussed in detail in the following paras. The assessee in the appeal filed qua the grounds raised is before the ITAT on two broad sets of grounds first being that the TPO may be directed to carry out the directions of the DRP and grant necessary relief; the second set of grounds assails the correctness of the order of the DRP. Software Development Segment 6. The issues agitated qua the software development segment as brought out in page 2 of the synopsis filed it was submitted have been formulated by us in the present proceedings in the following manner where the assessee prays:- a) that the TPO be directed to give effect to the Directions of the DRP to give working capital adjustment to the assessee; b) that the TPO be also directed to give effect to the Directions of the DRP to include Quintegra Solutions Ltd. as a comparable after verification; c) that Bodh Tree and Infosys Ltd. taken as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 96 of the TPO s order and is based on the OECD Guidelines as considered at internal page 98. The DRP considering these facts it was submitted was pleased to give the following directions to the TPO:- 3.12. Ground of objection 11- That the learned TPO has failed omake appropriate adjustment on account for differences in working capital employed by the assessee vis- -vis the comparables and in process also ignored the provisions of the India transfer Pricing Regulations and judicial pronouncements of the Honourable Income Tax Appellant Tribunal (ITAT) on this subject. DRP s Observation The DRP directs the TPO to work out the WCA by apportioning the debtor/creditors on the basis of segments of the assessee and provide working capital adjustment and re-compute margins accordingly. 7.3. Addressing the prayer made in (b) above attention was invited to page 8 (appeal page 33) of the DRP s order directing the TPO to verify and include Quintegra Solutions if the facts as claimed by the assessee are found to be correct. Inviting attention to the impugned order it was his submission that the said direction was never carried out by the TPO. It was his submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies are different. Rule 10B(2) also supports this view. 7.6.1. The record would show that applying this filter Quintegra Solutions Ltd. was excluded as a comparable as per internal page 53. The said position was objected to by the assessee before the DRP vide objection No.7. The DRP upheld the application of the said filter, however on facts, considering the assessee s claim that export sales of Quintegra Solutions Ltd. constitute 95.06% of its revenue from software development activity, the DRP at internal page 8 of its order (page 33 of the appeal set) is found to have given the following directions to the TPO:- TPO is directed to verify the correctness of the statement and if it qualifies the filter of export turnover, then, this company should be included. 7.6.2. In the said background, the Ld. AR has inviting attention to the relevant extracts of the Audited accounts at pages 388 389 of the Paper Book has made a prayer that the TPO be directed to follow the direction of the DRP. The Ld. CIT DR has submitted that he had no objection to the claim of the assessee being verified by the TPO. We find that having already observed in the earlier part of this o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual property rights in the work done by it in the development of software. The Hon ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. in comparison with such factors prevailing in the case of Agnity India Technologies Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon ble Delhi High Court held Infosys Ltd. to be incomparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are more or less similar inasmuch as the extant assessee is also a captive service provider with a limited number of employees at its disposal and also not owning any branded products but, rendering only offshore services with no expenditure on R D etc. When we consider all the above factors in a holistic manner, there remains absolutely no doubt in our mind that Infosys Technologies Ltd. is incomparable to the assessee compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of incurring, but, the income is recognized on the raising of bills in subsequent year, thereby distorting the figure of operating profit for a particular year. In contrast to that, the ld. AR submitted that the assessee was recognizing revenue from software development side by side without waiting for the completion of the project. 9.5. Under the mercantile system of accounting, income is recognized at the time of its accrual and the expenses become deductible when liability to pay is incurred. The dates of actual payment of expenses or receipt of income become insignificant. This is also called `Matching concept , as per which income is recognized with the incurring of expenses. To put it simply, if income does not accrue from a particular transaction, the expenses incurred for such transaction are excluded from the Trading and Profit loss account by carrying them to Balance sheet. To illustrate, if there is an incomplete contract worth ₹ 100 for doing a particular work, and the assessee has incurred ₹ 60 on this project till the close of the year, but the income is to be recognized only on the completion of the project which event will take place in the subse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Annual report of this company and point out the amount of expenses capitalized in respect of incomplete work at the end of the year. On the next date of hearing, the ld. DR failed to specifically point out any amount of such capitalized expenses with the opening or closing balance. This prima facie shows that the expenses incurred in respect of incomplete projects of software development at the end of the year, but billed in the subsequent year, were, in fact, treated as expenses for the current year alone. In the same manner, expenses incurred in the preceding year for the contracts of software development remaining incomplete at the end of the year, also must have been included in the expenses of the last year alone, but, the income getting recognized on the raising of bills in the current year. This albeit, patently deforms the correct profitability on year to year basis, yet, but we cannot help the situation. When the position of accounts of Bodhtree is such that it does not properly match expenses with revenue, it loses its credibility for making a logical comparison with a company that accounts for expenses matching with the revenue. Once it is held that the profits of Bodht ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. The audited accounts reflecting year end balance it was submitted is at Paper Book page 269. 9.2. Without prejudice to this argument, it was submitted the claim may be considered in the light of the decision of the Hon ble Mumbai High Court dated 08.01.2013 in the case of CIT vs Indo-American Jewellery Ltd. ITA (L) No.1053 of 2012. Attention was invited to specific para 5 of page 3 of the same. For ready-reference it is reproduced hereunder:- 5. On appeal filed by the Revenue, the ITAT upheld the order of CIT(A). While, upholding the order of CIT(A) the ITAT held that interest income is associated only with the lending or borrowing of money and not in case of sale. We express no opinion on the above reasoning of the ITAT and keep that reasoning open for debate in an appropriate case. However, in the facts of the present case, the specific finding of the ITAT is that there is complete uniformity in the act of the assessee in not charging interest from both the Associated Enterprises and Non Associated Enterprises-debtors and the delay in realization of the export proceeds in both the cases is same. In these circumstances the decision of the Tribunal in deleting the notion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent case, we deem it appropriate to restore the issue back to the TPO allowing the alternate prayer of the assessee directing the TPO to restrict the addition if any to the net outstanding receivables and not gross outstanding receivables. Software Distribution Segment 12. Addressing the last issue agitated by the assessee vide ground 15 to 17 it was the submission of the Ld. AR while referring to page 297 of the Paper Book that the transaction is closely linked to software distribution segment wherein TNMM approach has been followed. Carrying us through the show-cause notice dated 14.1.2.2012 issued by the TPO extracted at page 69 to 70 by the TPO and the reply of the assessee dated 24.12.2012 as per page 403 and 410 of the Paper Book the Ld. AR submitted that the TPO rejecting the assessee s claim concluded the issue as per page 76 to 95 of the appeal set. Aggrieved by this the issue was agitated before the DRP on the following points:- Objection on TNMM vs CUP Page 137 of PB-1 Objection on No benefit Page 154 of PB-1 Table on need vs Benefit Page 167 of PB-1 13. Referring to page 37 of the appeal set (internal page 12 of the DRP) it was submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... longwith Paper Book page 413 titled as Addendum to the Transfer Price Agreement in effect as on 01.04.2004. The said document records that the following documents would be maintained:- Now therefore parties wish to confirm their existing mutual understanding as follows:- Bentley US shall supply such documentary evidence as Bentley India may reasonably require as substantiation of the level of the charges in support of the actual fee. The documentation will include (where applicable): * A copy of the actual fee calculation; * Detail of the calculation of allocation factors; and * A narrative of the actual services that were provided. This memorandum is to confirm the understanding between the parties from 1st April 2004. 15.1. Thus from a reading of the above, it is evident that the above documentation was required to be maintained and it is seen that it has not been placed on record. The assessee is directed to place the necessary supporting evidences on record. While so holding, we deem it appropriate to hold that the queries made in the show cause notice dated 14.12.2012 requiring the assessee to demonstrate the need and necessity for obtain t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
