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TMI Blog2017 (12) TMI 1117X X X X Extracts X X X X X X X X Extracts X X X X ..... with the order passed by the Learned Transfer Pricing Officer (hereinafter referred as 'TPO'), under section 92CA(3) of the Act is bad in law and void ab-initio, 1.2. That the Learned DRP erred in not holding that the order of TPO and the draft order of the AO (in so far it relates to transfer pricing proceedings) are void ab initio as the conditions of section ne (3) of the Act have not been satisfied. 2, Determination of arm's length price by the AO, TPO and DRP for Management Support Services received by the Appellant On the facts and circumstances of the case, the Learned AO, DRP and TPO erred in rejecting the transfer pricing analysis undertaken by the Appellant with respect to the Management Support Services without appreciating the contentions, arguments, voluminous documentary evidences and data put forward by the Appellant during the course of the proceedings before them, and in doing so, have grossly erred in - 2.1 Making an adjustment of Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of the Appellant; 3.2 Concluding that the IT services received by PIL from the AE are in the nature of stewardship services leading to direct benefit to the AE and no proximate benefit to the Appellant; 3.3 Concluding the arm's length price for IT services paid by the Appellant to be Nil; 3.4 Completely disregarding the benefits received by the Appellant on receipt of such IT services and not appreciating that such IT services are prerequisite for Appellant's business which have significantly assisted appellant in achieving its daily operating efficacy; and 3.5 Completely ignoring the fact that the tangible evidences furnished during the assessment proceedings which unambiguously demonstrate that the Appellant has significantly utilized those IT infrastructures and systems in its daily operations. 4. Rule of consistency 4.1 The Learned AO, DRP and TPO erred in disallowing the payments 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 precedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riation of 5% from the arithmetic mean. 6.1 The Appellant reserves the right for the benefits arising out of the proviso to Section 92C(2) of the Act. 7. Depreciation on moulds 7.1. The Learned AO and DRP erred in law and on facts in disallowing Rs. 2,67,54,530 being excess depreciation to the tune of 15% claimed by the Company on moulds. 7.2. The Learned AO and DRP erred in law and on facts in disallowing the excess depreciation on moulds without taking cognizance of the provisions of the Act read with Income-tax Rules, 1962. 7.3. The Learned AO and DRP erred on facts in holding that the moulds are not used for the purpose of the business of the Company and are not used in rubber/plastic factory. 8. Short credit of tax deducted at source 8.1. The Learned AO erred in granting credit of tax deducted at source of Rs. 3,71,65,130 instead of Rs. 4,84,89,927, thereby resulting in short grant of credit of Rs. 1,13,24,797. 9. Interest under section 234A 9.1. The Learned AO erred in levying interest of Rs. 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 Rs. 39,96,22,576 under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hmarking study was conducted using TNMM as the most appropriate method and it was concluded by the assessee that its international transactions of the Healthcare division relating to the distribution function are in compliance with the arm's length principle. Lighting Lighting business spans the entire lighting value chain - from lighting sources, electronics and controls to full applications and solutions. It consists of Lamps, Consumer Luminaries, Professional luminaries, Lighting Electronics and controls, Automotive Lighting, Special Lighting Applications etc. A benchmarking study was conducted using TNMM as the most appropriate method and it was concluded by the assessee that its international transactions of the Lighting division relating 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hods; 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; iv) Developments of data processing; d. Fiscal and legal matters, including patents, trademarks and customs duties, particularly in international transactions; e. Personnel matters, particularly with respect to: i) The selection and training of personnel; ii) An adequate personnel policy; f. Insurances; g. Admittance at the company's specific request and at mutually agreed times of a reasonable number of employees of the company 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these cost were calculated on the basis of Management support service agreement dated 22nd October 2004 with AE. The auditor has confirmed that they conducted their examination in accordance with international standards on Assurance Engagements. In the above certificate, inter alia, the auditor has certified: o Cost of concern activities as per division as a percentage of relevant world turnover; o Calculation factor regarding sub-division organization cost on the basis of production; o Cost of concern activities per sub-division/lower level as a percentage of sales to third parties or relevant turnover; o Calculation factor regarding development activities; 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein the mark up of 10% was benchmarked and the same was also proved to be at arm's length. Since the AE provided services to group companies which inter-alia were located in Asia Pacific region including the assessee, the comparables were chosen from Pan Asia region. The TPO failed to appreciate this aspect. The rationale for using comparables from Pan Asia region was to substantiate that the Pan Asian companies, providing services similar to what the AEs are providing, are charging a markup in line with what the AE is charging. Hence there is no loss to the Indian revenue when the assessee is availing services from the AE rather than availing services 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t) and Information Technology Services (ITS for short) are taken up together for disposal as a common theme runs through them. The elementary objection of the A' was that the AO miserably failed to appreciate the fact that the MSS &. ITS were continuously flowing services received by the A' from its AEs to add muscles to and improve the daily operational efficiencies of the A' in India. The business challenges, dynamics and stiff competition the market faced by the A' predicated hiring of the above services, which were not taken cognizance of by the TPO. It was further alleged by the A' that the TPO completely 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; relating to Intra-Group Services (IGs in short) 2. Identification of each & every service. 3. Amount paid for each service 4. Contemporaneous documentary evidence to demonstrate that such services were actually received. 5. Justifying the need for such services 6. When and how the services were requisitioned from the AEs 7. How the rate of payment for IGs determined and whether agreements contain any whisper of the same. 8. Whether cost benefit analysis was done while requisitioning the services payment of the IGs 9. Expected benefit from the Intra-Group services vis-a-vis the 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 renderi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al demonstrated that the nexus between the services rendered by the AEs and their direct benefit to the A' was conspicuously absent. The methodology for pricing such a service was also not done on any scientific basis. The bills also were silent on how the AEs put-the cost on such services. The specific nature of services was also not discernible from the bills. All the bills merely stated services charges etc. without describing the exact nature of services. Thus, from the evidence made available by the A' in the form of additional evidence i.e. agreements, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service, within the ambit of Transfer Pricing provisions. However, they fail to pro-vide any further guidance on the approach to be followed while benchmarking intra-group services. Reliance is thus, placed on the international tax practices followed in the UN TP Manual, OECD Guidelines, the United States Transfer Pricing regulations etc. both by the taxpayer and the Revenue while undertaking the compliance and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to other group members. An independent enterprise in an uncontrolled environment is not expected to make payments for an incidental benefit associated with another set of uncontrolled transaction. Basis this, it can be surmised that incidental benefit do not require an independent remuneration arrangement. The Delhi Tribunal in the case of M/s Knorr-Bremse India Pvt. Ltd vs ACIT TS-700-ITAT-2012 (Del)held that professional consultancy and management fee paid by the appellant were only towards incidental 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 wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and is expected to cover every possible detail. The agreement should list the services to be provided along with how and when these services are be requisitioned. The agreement should provide what costs are to be included in the charge for the services and the basis of determining the payment for various categories of services. In case the all or a part of the service is outsourced to a third party, the same may be mentioned in the agreement along with the mark-up, if any charged on 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by employees of service recipient along with the amount paid for the product / services and the quantity; Role of recipient company's personnel engaged in information technology operations vis.a vis. The role of the service provider so as to establish nonduplicity of services. 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 mechanis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioning that the High Court in this judgment has sought to create a distinction between the In the case of Deloitte Consulting India (P.) Ltd. Vs DCIT [2012] benefit test i.e. examining services exists or 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting, auditing, financial, fiscal, social and legal matters and in all other fields in which Philips has know-how and experience. Philips shall make available to the Company such 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deliver products to the customer ; and - sell functions include marketing, advertising , sales and distribution 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnel and in the process, 'made available' 'technical knowledge, experience, skill' to the 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. Henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvinced 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. We find that no adjustments to ALP was made in the Asst Years 2005-06 to 2008-09 in respect of the very same MSSA by the ld TPO for the assessee. We find that the principles of consistency need to be followed and cannot be given a go by when there is no change in the facts and circumstances of the case from the earlier years. Reliance in this regard is placed on the decision of the Hon'ble Supreme Court in the case of Radhasaomi Satsang vs CIT reported in (1992) 193 ITR 321 (SC) . 4.6. We find that the decision relied upon by the ld AR on the Hon'ble Delhi High Court in the case of CIT vs Cushman and Wakefield (India) (P) Ltd reported in (2014) 367 ITR 730 (Del) is well founded wherein it was held that :- "35. The Transfer Pricing Officer's report is, subsequent to the Finance Act, 2007, binding on the Assessing Officer. Thus, it becomes all the more imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m) 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 taxmann.com 199/209 Taxman 200 as well as CIT v. Cushman & Wakefield (India) (P.) Ltd.[2014] 367 ITR 730/46 taxmann.com 317 (Delhi), rendered similar ruling as was rendered in the case of Dresser-Rand India (P.) Ltd. (supra). In the case of Cushman & Wakefield India (P.) Ltd. (supra), the Hon'ble Delhi High Court observed that whether a third party - in an uncontrolled transaction with the Taxpayer would have charged amounts lower, equal to or greater than the amounts claimed by the AEs, has to perforce be tested under the various methods prescribed under the Indian TP provisions. In the context of cost sharing arrangement, the Hon'ble High Court opined that concept of base erosion is not a logical inference from the fact that the AEs have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tments/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 establish that transactions resulted in a profit does not indicate that they were not at an arm's length price and even if profit is established, it does not necessarily follow that transaction was at an arm's length price - Held, yes [Para 21] We find that this judgment had approved the earlier decision of Hon'ble Delhi High Court in the case of Cushman and Wakefield (India) (P) Ltd supra and also the decision of EKL Appliances supra. 4.9. In view of the aforesaid findings and respectfully following the judicial precedent relied upon hereinabove, we hold that the determination of ALP for Management Support Services at Rs NIL is unwarranted and accordingly the upward adjustment made by the ld TPO in the sum of Rs. 125,27,30,863/- is deleted. Accordingly, the Grounds Nos. 2 & 3 raised by the assessee are allowed. In view of above we find that the assessee has actually received MSSA services from the AE and it cannot be cate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Connectivity Enablement (PEACE): PEACE enables non-DIAMOD email enabled applications to communicate with other email enabled applications and Philips users using a secure and efficient corporate infrastructure. (Refer page 60-61 of Volume 1 part-1-DRP submissions). For allocation of IT costs, the total cost of the Group's IT services was divided by the total quantity (units) to arrive at the price per unit of service charge. The price per unit is thereafter applied to number of users, applications or network connections used by the assessee. The assessee during assessment proceedings claimed that * The services were actually received; * Services received were directly beneficial to PIL and not its AEs; * The services resulted in operational efficiency of PIL and * Services were not in the nature of shareholder/stewardship activity. The assessee in support of his claim produced voluminous evidences before the TPO such as sample invoices, agreements to justif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 allocated based on the number of users, applications or network connections in India. It was further submitted that the charges were received from the AE based on cost with a limited mark-up of 5% thereon which is much lower than the arithmetic mean of the independent comparables selected for management support services which is with updated margin of 8.53%. Hence, the mark up of 5% on cost charged by the AE to the assessee for IT services may be considered to be at arm's length. Thus the IT services received from the AE have resulted in benefit to the assessee without which the assessee would not have been able to function efficiently. However, the ld. DRP rejected the contentions of the assessee & confirmed the order of the TPO. The findings of the DRP observations has already been recorded in Para 8 of this order. Being aggrieved by the order of Ld. Dispute Resolution Panel (DRP), assessee has come up in appeal before us. 14. The ld. AR before us made the submissions whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under ss. 11 and 12 of the IT Act of 1961." 15.1 We observe that there is no change in the facts & circumstances of the case, therefore in our considered view the order of the ld. DRP needs to be reversed. Besides the above we also note that for the AY 2009-10 & 2010-11 the Hon'ble ITAT in the own case of the assessee in ITA No. 1141/Kol/2016 & 2408/Kol/2016 set aside the matter to the ld. DRP for fresh adjudication and subsequently the ld. DRP was pleased to delete the addition as made by the TPO. The subsequent order of the ld. DRP are placed on pages 727 & 766 of the paper book. Similarly we also note that there was no addition made by the ld. DRP for the AY 2012-13 & 2013-14 on account of IT services expenses incurred by the assessee. The copies of the orders are placed on pages 795 & 879 of the paper book. In view of abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oftware and Export Ltd* Standalone 0.36 (0.5 8) 9.29 6.52 5.85 5.91 5.47% -9.96% 4.98% 0.37% 3 Evoke Technologie s Pvt Ltd Standalone 2.10 1.68 1.09 10.54 9.18 13.40 19.93% 18.29% 8.11% 14.69% 4 I Power Solution India Ltd Standalone 0.01 0.03 0.01 0.89 0.59 0.41 1.21% 4.73% 2.86% 2.67% 5 Kashyap Technologie s Ltd Standalone (1.86 ) 2.59 0.97 46.96 40.16 18.06 -3.95% 6.45% 5.36% 1.62% 6 Melstar Information Technologie s Ltd Standalone (1.51 ) NC 0.84 19.88 NC 24.38 -7.60% NC 3.44% -1.52% 7 Persistent Systems Ltd Consolidate d 62.56 120. 33 135.0 5 532.11 487.4 2 659.9 2 11.76% 24.69% 20.46% 18.93% 8 Spry Resources India Pvt. Ltd Standalone 0.68 0.68 0.67 3.95 2.06 3.63 17.19% 33.32% 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% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO proposed an adjustment to the tune of Rs. 49,57,73,339/- towards software development services rendered by the assessee to its AEs. 18. Aggrieved assessee preferred an appeal to ld. DRP wherein it was submitted that the TPO disregarded the comparable set of the assessee without providing any cogent reasons. The TPO insisted on use of current year data. Further, goodself he applied an ad hoc and arbitrary approach. The assessee submits that this approach exemplifies cherry picking and thus bad in law and against the principle of natural justice. The comparable selected by the TPO inter alia suffers from the following lacuna: * Functionally not comparable to the assessee (-the assessee is engaged in the business of software development. The comparable selected by your goodself are in the business ranging from professional services, system integration, provider of solutions to network equipment manufacturers, IIT/ITES service provider etc. these comparables should not be considered for comparability analysis. * Comparables having significant intangibles and research & development activity (such as Sasken, Tata Elxsi and Infosys) - the assessee is a captive service provider. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conducted applying various search criteria. Hence, the act of the Ld. TPO of rejecting the comparable selected by it without providing any cogent reason is totally unjustified. Based on the above, the assessee submits that the comparable set selected by the assessee should be accepted. However the ld. DRP rejected certain Nos. of companies for the purpose of comparison as proposed by the TPO. At the same time the ld. DRP retained certain companies as submitted by the assessee for the purpose of comparison to determine the ALP. The contentions of the assessee & observation of the ld. DRP in respect of the companies retained & rejected are recorded in its order on the pages 22 to 42. Besides the above the above the ld. DRP also directed to make the adjustments for the working capital adjustments in respect of certain companies. Being aggrieved by the order of ld. DRP, both assessee & Revenue came in 2nd appeal before us. The grievances of the assessee are two folds. (1) The learned DRP erred in accepting certain companies as recommended by the TPO for the purpose of comparables. (2) The TPO failed to provide working capital adjustments as directed by the learned DRP. On the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not appearing in the final list of comparables in respect to the TPO order for:- * AY 2009-10 (refer Pg. no 212 of the order) * AY 2010-11 (refer Pg. 28 of the order) * AY 2012-13 (refer Pg no. 6 of the order giving effect to DRP directions) * AY 2013-14 (refer Pg no. 26 of the order) and * AY 2014-15 (refer Pg no. 32 of the order) 3. Persistent System Limited (a) Functionally not comparable - Persistent systems is engaged in provision of outsourced product development services for independent software vendors and enterprises, which is different in nature from IT services. The company derives income from both software services & products. (b) Segmental information not available - P&L shows income from "sale of software services & Products. However, no break-u available in respect of the same. There is no segmental information available in their annual report. (c) Owns intangibles- The company also owns intangibles. (d) Engaged in R&D activity - The company also undertakes R&D activity. (e) Acquisitions during the year: Persistent has also undertaken acquisitions during the year Separate charts to be seen for detailed arguments & case laws. Similarly the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % erroneously computed by the TPO. 2. ICRA Techno Analytics Ltd. (ICRA):- The Hon'ble DRP in their directions had rightly rejected IC by stating that it is engaged in software development along with ITeS, also segmental details are not available. Accordingly, the contentions of the assessee against ICRA is reproduced as under:- (a) Functionally not comparable - ICRA Techno Aanlytics is not functionally comparable as it is engaged in diversified activities consisting of business analytics & Intelligence (BPO activities),web development, trading of computer software etc. (b) Segmental not available - The company does not have segmental information in their annual report in relation to its diversified activities. (c) Related party transactions - The company has RPT of 22.06% during the year. (d) Acquisition during the year - During the year, the company has undertaken merger of its subsidiary "Axiom" with itself. Separate charges to be seen for detailed arguments & case laws. 3. Larsen & Toubro Infotech Ltd. (L&T):- The Hon'ble DRP in their directions had rightly rejected L&T by stating that it has intangibles for its propriety products & services etc. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties like embedded product design, industrial design services, animation and visual effects etc., for which the segmental is not available. (d) Engaged in R&D activity - The company is also engaged in significant Research and development. (e) Owns intangibles - Tat Elxsi earns revenues from in-house developed intellectual properties. The ld. AR also submitted the details of the companies which have been accepted by the ld. DRP for the purpose of comparables. The details stands as under:- 6. Bells Softech Ltd. (Bells Softech):- The Hon'ble DRP in their directions had rightly accepted Bells Softech by stating that the company is functionally comparable. Accordingly, the submissions of the assessee with respect to Bells Softech is reproduced as under:- (a) Functionally comparable:- Bells Softech is functionally comparable as it is engaged in the provision of software solution service and it derives its revenue from software development services. 7. CG Vak Softwre & Export Ltd (Seg) ("CG Vak"):- The Hon'ble 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. E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rightly accepted Melstar 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:- Melstar is functionally comparable as it is engaged in providing software services. (b) Accepted by DRP in AY 2009-10:- The company was also accepted by the DRP in AY 22009-10. The ld. AR also submitted that no fresh list of companies has been submitted before the learned DRP for the purpose of comparables. The ld. AR vehemently supported the order of ld. DRP. 20. We have heard the rival submissions and perused the materials available on record. There is no dispute on the application of TNMM as the MAM with PLI OP / OC except in one company i.e. Persistent system & solutions limited. As per the assessee it should be 16% and the same should be at 13.63% after working capital adjustment. The necessary working as made by the assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that there was no ground of appeal of the Revenue against the direction of ld. DRP. Hence the TPO is directed to follow the direction of the ld. DRP for providing adjustment for working capital. 21.3 We also observe that the assessee is getting the relief on 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 depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these are used in plastic factories. However, the amount of depreciation claimed by the assessee on moulds was disallowed by the assessee on the ground that higher rate of depreciation on moulds is available only if these are used in the 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the assessee is that the surcharge on DDT should have been levied @ 5% only. 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. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cepted the same. The assessee before TPO during the course of Transfer Pricing Proceedings also made detailed submissions in respect of AMP expenses as detailed under :- * 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses cannot be considered as "international transactions". In this regard, Section 92(1) of the Act provides the following: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... romotion of some Nestle products in India may give rise to certain benefit to Nestle SA, but this cannot be a 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts and observations of the case are discussed below: Facts Of The Case. * The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AMP expenses constitute the international 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 co ..... 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 Rs.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 Rs.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 loan was not avai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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