Contact us   Feedback   Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2015 (11) TMI 1508 - ITAT DELHI

2015 (11) TMI 1508 - ITAT DELHI - TMI - Transfer pricing adjustment - working capital adjustments directed by the DRP - Held that:- Considering the grievance posed qua the working capital adjustments directed by the DRP, we are of the view that in the peculiar facts and circumstances of the case in the face of the above quoted speaking directions the TPO in judicial propriety had no occasion to ignore the directions of the higher forum and was bound to follow the directions issued by the DRP wha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

.T.A. No. 6261/Del/2015 - Dated:- 4-11-2015 - 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 the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

el ( 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 erred by not accepting the economic analysis undertaken by the appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("the Rules"). 10. The AO/DRP has erred in wrongly rejecting certain companies and adding certain companies to the final set of com .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ital adjustment and re-compute margins accordingly. 14. The AO / DRP / TPO has erred by holding inter-company receivables to constitute an international transaction and proceeding to benchmark the same by application of Comparable Uncontrolled Price ("CUP") method. 15. The AO / DRP has erred in rejecting the combined transaction approach of benchmarking adopted by the appellant in its TP documentation and proceeding to determine the arm's length price of the international transacti .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

submissions and documents presented by the appellant during the assessment and DRP proceedings. 3. Addressing the above grounds it was submitted that Ground Nos.-1 & 2 were general in nature and may not require any specific adjudication. Referring to the synopsis and the chart capturing the issues the Ld. AR submitted that the assessee does not want to press Grounds Nos.3 to 9 raised in the present appeal. Further the issues raised in Ground Nos.12 & 13 it was stated also are not being p .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tity 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 sub .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

transactions were entered into by the assessee (these have been culled out in the synopsis in the following manner):- S.No. Summary of International Transactions Transaction Value Methodology used Software distribution segment 1. Import of software 10,04,04,589 TNMM with OP/OR a PLI 2. Payment of royalty 4,73,69,738 3. Payment of Corporate service fee 3,28,53,581 4. Waiver of Liability 3,37,97,619 Software development services 5. Provision of software development services 10,54,94,286 TNMM with .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

mined by assessee (INR ALP determined by this office (INR) Adjustment u/s 92CA (INR) 1. Receivable Nil 51,05,322 51,05,322 2. Payment of corporate service fee 3,28,53,581 Nil 3,28,53,581 3. Provision of software services 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 ITA .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 comparables be directed to be excluded; and d) that the addition made by re-characterizing the inter company receivables as unsecured loans be deleted. 7. The background justifying the prayers addressed in (a), .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

12% mark up (Calculated at per the terms of the agreement). Further the agreement also stipulated that the appellant shall be invoiced on quarterly basis and shall be paid within 30 days as per ht instructions in the invoice. (Copy of agreement is enclosed as ANNEXURE-A of this synopsis). During the year under consideration, TNMM was applied as the most appropriate method and OP/OC of the Appellant was taken to be the Profit Level Indicator ( PLI ) (pg 317 of the TP Study-PB-1). The method has n .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

re at internal page 10 of the order in para 3.12. 7.2. In the said background the Ld. AR inviting attention to the past history on the issue submitted that pursuant to similar directions given by the DRP in 2007-08, 2008-09 & 2010-11 assessment years, the TPO has given a working capital adjustment to the assessee. The working capital adjustment details requested for in the year under consideration it was submitted were provided to the TPO and are available at pages 390 to 392 of the Paper Bo .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

d by the assessee vis-à-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 atte .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ssee which is 12.09%. The relevant extracts of the Audited accounts of Quintegra Solutions Ltd. it was submitted is at page 388 & 389 of the Paper Book. Based on these financials it was submitted that a letter had been filed with the TPO requesting that the directions of the DRP may be carried out. Copy of this letter it was submitted is at pages 393 to 395 of the Paper Book. 7.4. The CIT DR on both the issues stated that he would have no objections if the directions of the DRP are carried o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sue in terms of the speaking direction of the DRP and pass a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard. 7.6. Addressing the next grievance of the assessee wherein the directions given by the DRP qua the inclusion of Quintegra Solutions Ltd. which have not been carried out by the TPO, we find on facts that the said comparable was taken by the assessee in its transfer pricing study; this fact is borne out from page 385 of the Paper Book .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

velopment are excluded. This has been done primarily to exclude predominantly domestic companies which cannot be compared with you having entire transactions with your AE. This is because economic circumstances of such 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. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ded. 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 order that the TPO as per judicial discipline was bound to give effect to the directio .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ress the grievance posed by the assessee in Ground No.10 raised in the present proceedings wherein the assessee prays for the exclusion of Infosys Ltd. and BodhTree Consulting Ltd. which prayer has been rejected by the DRP, we find that the assessee in the present proceedings in support of its prayer has relied upon the decision dated 24.04.2015 in the case of Cienna India Pvt. Ltd. of the Co-ordinate Bench in ITA No.1453/Del/2014 pertains to 2009-10 assessment year. 8.1. A perusal of the said o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

id comparable sought by the assessee was not agreed to either by the TPO or by the DRP. The issue travelled to the ITAT and the Co-ordinate Bench in the facts of that case directed the exclusion of the Infosys Technologies Ltd. as a comparable vide para 8.2 of the order. The same is extracted hereunder for ready-reference:- 8.2. We have considered the rival submissions and perused the relevant material on record. It can be seen that the TPO has included this company in the list of comparables by .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ness 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 Agni .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

espectfully following the judgment of the Hon ble jurisdictional High Court in Agnity India (supra), we hold that Infosys Technologies Ltd., cannot be held as comparable with the assessee company. This company is, therefore, directed to be excluded from the list of comparables. (emphasis provided) 8.2. Considering the facts of the present case and the facts of the Cienna India Pvt. Ltd. it is seen that both the companies are wholly owned subsidiaries of US Companies and qua the segment are capti .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Ltd. as a comparable company has to be excluded from the list of comparables. 8.3. Since even for the purposes of exclusion of Bodh Tree Consulting Ltd. the reliance had been placed on the decision of the Co-ordinate Bench in the case of Cienna India Pvt. Ltd. it is seen that the discussion is available at para 9.4 to 9.6 of the aforesaid order wherein after a detailed discussion the Co-ordinate Bench was pleased to hold that the profits of Bodh Tree Consulting Ltd. do not represent fair profit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

enue recognition. He invited our attention towards the Annual report of this company, in which it has been specifically reported that revenue from software development is recognized based on software developed and billed to clients. He submitted that the costs incurred by this company in respect of the projects pending completion at the end of the year are booked at the time of incurring, but, the income is recognized on the raising of bills in subsequent year, thereby distorting the figure of o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 onl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

expenses incurred in the year of raising of the bill. In this way, the profit for the earlier year of incurring expenses of ₹ 60 and the next year of raising invoice of ₹ 100 gives true and fair view of the profitability of that enterprise for both the years. If this enterprise, instead of capitalizing ₹ 60 in the first year, claims deduction in the year of incurring itself but recognizes income of ₹ 100 in the next year, then profit of both the years, namely, the first .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

development may be capitalized, which appears to be a more rational manner of depicting the true and fair view of the profitability of the enterprise; and the second, in which such expenses may be straightway taken as revenue cost for the year of its incurring itself, which may not reflect a true and fair view of the profits on year to year basis. The contention of the ld. AR is that whereas Bodhtree fell into the second situation, the assessee was in the first situation. Though this contention .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nd 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 Bodhtree Consulting Ltd. do not represent fair profitability on year to year basis, this company loses its tag of an effective comparable. We, therefore, order for the exclusion of this company from the final list of comparables. 9. Addressing the next issue agitated by the assessee, attention was invited to Paper Book page 302 which i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

paras 6 to 6.2.10 submitted that the TPO re-characterized the receivables shown by the assessee as unsecured loans and after obtaining information u/s 133(6) of the Income Tax Act, 1961 from M/s Cirisil Limited imputed that the interests rate @ 15.77%. Carrying us through the objections advanced on behalf of the assessee assailing this before the DRP wherein it was argued that the assessee does not charge any interests on receivables from the AE where the assessee was captive service provider th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

bmission that since on facts the departmental appeal was dismissed the issue was not agitated by the assessee. Thus it was his submission that if the Bench is not in agreement with the main submissions advanced then the alternate argument would be to consider on fact allowability on the basis of net outstanding. Referring to the record it was submitted that it would show that the payable every month in the year is always more and the receivable is much less thus on account of this fact as eviden .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ereunder:- 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 i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ent of the assessee may be considered which would demonstrate that the assessee is not charging interest on the outstanding balances from its AE nor is the assessee paying any such interest. Referring to the Paper Book page 396 which was placed before the TPO as well as DRP it was submitted that the alternate prayer was made that the adjustment if any at best could be limited to net outstanding receivables and not on the basis of gross outstanding receivables. 9.4. Inviting attention to Paper Bo .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

other debt arising during the course of business and relying on the order dated 06.07.2015 in Techbooks International Pvt. Ltd. vs DCIT [ITA No.240/Del/2015] has correctly held it to be a separate international taxation. Accordingly it was his submission that the decision of the Hon ble Bombay High Court in Indo-American Jewellery relied upon by the assessee is of no relevance as the Amendment has not been considered therein. 11. We have heard the rival submissions and perused the material avail .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ITR 516 (Bom.) which issue has not been argued by the Ld. AR and consequently not addressed by the Ld. DR accordingly in the facts of the present 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 s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 that the Objections raised by the assessee were rejected. Assailing this position it was submitted that the ITAT vide order dated 18.02.2015 in ITA No.6160/Del/2013 in assessee s case for 20 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

evidences were made available before the TPO. It was his submission that following the earlier years, the claim of the assessee was not accepted by the tax authority. Accordingly following the view taken in the earlier year, it was submitted the issue may be restored or considering the facts and evidences on record relief may be granted at this Forum itself. 14. Ld. CIT DR relying upon the TPO and DRP s order submitted that the assessee has not provided the facts and figures on record. The follo .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ctions made before the DRP demonstrate we find on facts that the issue necessarily has to be restored back to the TPO. On considering the evidences filed, we hold that the evidence relied upon in the Paper Book before us cannot be said to be sufficient and complete to address the issue and as per the agreement dated NIL stated to be effective from 01.01.2001 found placed at pages 411-412 it is seen that the documents described as copy of Inter Company Agreements for availing of Corporate service .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ry 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 documentati .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

eld. 15.2. Accordingly, in view of the above considering the submission of the parties before the Bench the impugned order on this count is set aside and the issue is restored back to the TPO/AO with the direction to pass a speaking order in accordance with law considering the view taken in the earlier years on the issue. The assessee is permitted to file fresh evidences before the TPO/AO in support of its claim. 16. Accordingly in view of the fact where various grounds have not been pressed the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version