TaxTMI 
TaxTMI 
2016 (11) TMI 1402
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...., under Section 143(3) r.w.s 144C(13) of the Income- tax Act, 1961 ('Act') (' Assessment order'), in pursuance of the directions issued by Dispute Resolution Panel - 2 ('Hon'ble DRP'), Mumbai, on the following grounds: On the facts and circumstances of the case and in law, the Learned AO, based on the directions of the Hon'ble DRP has: General Ground I. erred in assessing the total income of the Appellant at Rs. 65,05,53,290 against Rs. 38,75,66,510 as computed by the Appellant in its return of income; Transfer Pricing Grounds 2. erred in making a transfer pricing adjustment of Rs. 26,29,86,783 to the total income of the Appellant on the premise that the international transactions entered by the Appellant with its associated enterprises (' AE') were not at arm's length; Reference made to the Transfer Pricing Officer 3. erred in referring the Appellant's case to the Learned Transfer Pricing Officer ('TPO') under Section 92CA(1) of the act, without satisfying the conditions specified therein; Rejection of economic analysis undertaken by the Appellant and using single year data 4. erred in rejecting the transfer....
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....ain; 12. erred in rejecting Quintegra Solutions Limited as a comparable company on the basis that the company is functionally different and has substantial related party transactions, disregarding the fact that the company is engaged in providing software services similar to the Appellant and has related party transactions well within the prescribed limits. 13. erred in rejecting Saven Technologies Limited as a comparable company on the basis that it has substantial related party transactions without appreciating that the consolidated financial statements of the company was used by the Appellant wherein the impact of related party transactions is eliminated; Additional Comparables introduced by the Learned TPO 14. erred in considering Acropetal Technologies Limited as a comparable without appreciating that the company is functionally different, owns significant intangibles and has earned supernormal profits and/ or having exceptional year of performance during FY 20 I 0-11; 15. erred in considering E-Infochips Limited as a comparable without appreciating that the company is functionally different and has earned supernormal profits and! or having exceptional year of perfor....
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....6 instead of Rs. 5,14,69,706; Interest under Section 234C of the Act of Rs. 53,67,503 26. erred in levying interest under Section 234C of the Act on assessed income without appreciating that the interest under section 234C is applicable on returned income; Penalty Proceedings 27. erred in initiating penalty proceedings under Section 271 (1)(c) of the Act. Each of the above ground of appeal is without prejudice to and independent of one another. The Appellant craves leave to add, alter, amend or delete the above ground of appeal at or before the time of hearing of the appeal, so as to enable the Hon'ble Income tax Appellate Tribunal to decide this appeal according to law. REVENUE'S GROUNDS OF APPEAL:- 1. Whether, on facts and circumstances of the case, the DRP is justified in directing the assessing Officer to include M/s CAT technology Ltd and M/s CG-VAK software & Exports Ltd as comparables despite the fact that said comparables were also engaged in the business of 'medical transcription' and 'IT Consultancy" activities wherein, the assessee is engaged in providing software development services to its group entities. 2. Whether, on facts and circu....
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....ware development services and Recovery of expenses (service charges) and as a consequence the matter was referred to the Transfer Pricing Officer under section 92CA(1) of the Act for determination of the arm's length price of such international transactions. The Transfer Pricing Officer passed an order under section 92CA(3) of the Act dated 29/01/2015, wherein he worked out an adjustment of Rs. 36,49,98,330/- to the stated value of international transactions as under:- (i) Provision for software development services - Rs.33,30,47,046/- (ii)Recovery of expenses (Service Charges) - Rs. 3,19,51,284/- Total : Rs. 36,48,98,332/- 4.1 The Assessing Officer passed a draft assessment order dated 11/2/2015 under section 143(3) r.w.s. 144C of the Act proposing an adjustment of Rs. 36,48,98,332/- to the returned income against which assessee raised objections by approaching the Dispute Resolution Panel (DRP) on various grounds. The DRP accepted some of the objections raised by the assessee and vide its order dated 27/11/2015 directed the Assessing Officer to rework the adjustment in order to work-out the arm's length price of the international transactions. Accordingly, ....
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....is also not in dispute. In it's Transfer Pricing Study, assessee had selected a set of comparables, whose average profit margin was within the +/-5% range vis-a-vis assessee's margin and, therefore, the plea of the assessee was that no adjustment is required to be made to the stated value of the international transactions in order to determine it's arm's length price. The Assessing Officer, however, has determined an amount of Rs. 23,10,35,499/-, which was required to be added so as to bring the stated value of the transactions to its arm's length price relating to the international transactions for Provision of software development services. On this aspect assessee has raised multiple Grounds of appeal but in the course of hearing, arguments have been confined to three Grounds of appeal which we deal hereinafter. 6. By way of Ground of appeal No.15, the plea of the assessee is that M/s. M/s.E-Infochips Limited has been wrongly included in the list of comparables because the said concern is functionally dissimilar. It is pointed out that the said concern is engaged in rendering variety of services, i.e. software development services, sale of software products and I.T enabl....
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....are development services and it does not involve sale or development of software products or hardware. It is also quite evident that M/s.E-Infochips Limited is undertaking I.T enabled services, which also is distinct from the software development activities undertaken by the assessee. In fact, at the time of hearing, Ld. Representative for the assessee had relied upon the decision of the Delhi Bench of the Tribunal in the case of Saxo India Pvt. Ltd. vs. ACIT, ITA No.6148/Del/2015 dated 5th February, 2016, wherein under an identical situation, M/s.E-Infochips Limited has been found to be incomparable to a concern engaged in rendering pure software development services. Notably, the Tribunal has referred to the Annual Report of the said concern and made the following observations:- "10.2 After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025, Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at Rs. ....
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....inly engaged in software products and broadly comparable to that of the assessee." It is further pointed out that the DRP has also rejected the plea of the assessee for exclusion of the said concern because the activities were found to be similar to that of the assessee i.e. providing software development services. 9.2 On this aspect, we have carefully considered the rival submissions. A pertinent point raised by the assessee is to the effect that on the basis of level of respective turnovers, the said concern is incomparable. It has been pointed out that the turnover of the assessee is to the tune of Rs. 359,61,45,000/-, whereas M/s. Infosys Limited has a turnover of about Rs. 25,385.00 crores for the year under consideration. In this context, it was put to the parties in the course of hearing as to whether any turnover filter was applied either by the assessee in its Transfer Pricing Study or by the Transfer Pricing Officer in the course of the transfer pricing proceedings. In response, it has been stated before us that no turnover filter was used either by the assessee in its Transfer Pricing Study or by the Transfer Pricing Officer while selecting the comparables for the purpo....
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....essee as a captive service provider to its associated enterprises. Factually, it is also emerging that there is no segmental break-up available with respect to the production and sale of software products undertaken by the said concern, which is an aspect incomparable to the activities of the assessee. For the said reasons, we do not find any justification for inclusion of the said concern and the same is hereby directed to be excluded from the final set of comparables. Thus, on this aspect also assessee succeeds. 10. The next point argued by the assessee is way of Ground of appeal No.19, whereby it is pointed out that Wipro Technology Services Ltd., has been wrongly included as a comparable without appreciating that the said concern is functionally dissimilar and is operating under peculiar economic circumstances. In this context, it is seen that the Transfer Pricing Officer in para 4.1.6 has discussed the issue, and accordingly to him, the said concern is comparable to the assessee because it has reported revenues from software development and technology infra-services. Similarly, while dealing with the objection of the assessee, the DRP has affirmed the stand of the Transfer Pr....
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....m this company being functionally different and the availability of insufficient segmental information, there were also significant related party transactions. The TPO did not accept the assessee's contention of the related party transactions and proceeded to include it in the final set of comparables. 16.2. We have heard the rival submissions. Page 57 of the TPO's order is reproduction of the assessee's contention about the related party transactions as under :- "Wipro Technology Services Limited (formerly Citi Technology Services Limited) ('the Company') was incorporated on 15 September, 2004. The entire share capital of the Company was held by Citicorp Banking Corporation, a company incorporated under laws of Delaware, USA, upto 20 January, 2009. Wipro Limited (Wipro) executed an agreement with Citigroup Inc. for acquiring all of Citigroup interest in the Company w.e.f. 21 January 2009. On 21 January 2009, Wipro signed a master service agreement (MSA) with Citigroup Inc. for the delivery of technology infrastructure services and application development and maintenance services for the period of six years. The MSA provides for the delivery of at least $500 million in service ....
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.... associated enterprise'. On going through the prescription of sub-section (2) of section 92B, it is clearly borne out that a transaction with a non-AE shall be deemed to be a transaction entered into between two AEs if there exists a prior agreement in relation to the relevant transaction between the third person and the AE or the terms of the relevant transaction are determined in substance between the third person and the AE. When we consider section 92B(2) in combination with Rule 10A(a), it follows that the transaction between non-AEs shall be construed as a transaction between two AEs, if there exists a prior agreement in relation to the relevant transaction between third person and the AE. If such an agreement exists, the third person is also considered as an AE and the transaction with such third person becomes international transaction within the meaning of section 92B. Once there is a transaction between two associated enterprises, it ceases to be an 'uncontrolled transaction' and, thereby, goes out of reckoning under Rule 10B(1)(e)(ii). 16.5. Adverting to the facts of the instant case, we find that Wipro Technology Services Ltd. earned a revenue from Master services agr....
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....good comparable. 11.1 Having carefully considered the rival submissions, in our considered opinion, the said concern deserves to be excluded from the final set of comparables. It is quite clear that the comparable transactions executed by Wipro Technology Services Ltd. are in terms of an arrangement with related parties at the time of initiation of the arrangement, though in the relevant period, the relationship had undergone a change. The Delhi Tribunal in the case of Saxo India Pvt. Ltd.(supra) has clearly brought out that in the light of the structuring of the transaction, the transactions executed by Wipro Technology Services Ltd. do not qualify to be 'uncontrolled transactions' and, therefore, the same cannot be considered for the purposes of comparability analysis having regard to the provisions of Rule 10B(1)(e)(ii) of the Rules. In view fo the aforesaid discussion, we, therefore, direct the Assessing Officer/TPO to exclude the said concern from the final set of comparables. 12. At the time of hearing, it was pointed out by the Ld. Representative for the assessee that if assessee succeeds on the exclusion of the aforesaid three concerns from the final set of comparables, t....
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....t the payments towards such expenses were initially made by the assessee and later on recovered. The Transfer Pricing Officer was not satisfied with the explanation furnished by the assessee. The Transfer Pricing Officer observed that there was an element of service in such an arrangement and further noted that such expenses were recovered by the assessee from its associated enterprises after a certain time lag, during which period it had to bear the financial costs. For the aforesaid reasons, the Transfer Pricing Officer added 10% mark-up as means to compensate the assessee which came to Rs. 3,19,51,284/- and such amount was determined as income in the hands of the assessee. 13.1 Before us, the Ld. Representative for the assessee vehemently pointed out that the lower authorities have not appreciated the facts in their proper perspective. It has been explained that the impugned expenses relate to cost of travel, accommodation, visa expenses, per diem and other day to day expenses, which were incurred by the assessee's employees in the course of rendering services or other such expenses incurred on the specific request of the associated enterprises. Since the associated enterprises....
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....as canvassed by the assessee to substantiate that there was one to one co-relation and that the entire exercise did not involve any element of profit or mark-up in the hands of the associated enterprises. The aforesaid material is placed at pages 518 to 612 of the Paper Book and which was also before the lower authorities. At the time of hearing, the Ld. Representative for the assessee had also referred to page 613 to 645 of the Paper Book, wherein are placed copies of assessee's arrangement with the associated enterprises and also the sample agreements between the associated enterprises and the ultimate clients, which prescribe that all impugned travel and related expenses are separately chargeable on a cost to cost basis. All this material clearly brings out a pertinent feature that in the entire transaction involving payment of expenditure by the assessee, its recovery from the associated enterprises, which-in turn recovers it from the end clients, there is no involvement of any profit-element in the hands of the associated enterprises. Therefore, it would be wrong on the part of the income tax authorities to take a position and infer notionally about recovery of mark-up or prof....