TMI Blog2019 (6) TMI 1090X X X X Extracts X X X X X X X X Extracts X X X X ..... aking a look at details of advances to venders, it is observed that these are small payments all made on one single day in the month of May, 2012 totalling to ₹ 1,75,895/-, which is difficult for AO to verify. Upon a query being raised to Ld.Counsel regarding same, he submitted that, what is necessary to be verified is details of bad debts for which invoices have been placed. T here is no dispute that sum of ₹ 8,03,982/- has been written off by assessee in its books of accounts. From invoices placed at page 90-94, it is apparent that they pertain to preceding assessment years. Thus assessee satisfies requirements specified under section 36 (1) (vii) of the Act. TP adjustment - comparable selection - HELD THAT:- Referring to functions performed, assets involved and risk assumed by assessee under software development service segment companies functionally dissimilar with that of assessee need to deselected from final list. Infosys Ltd. company was owning brand and having substantial intangible assets which cannot be held to be suitable comparable for assessee who was only providing software deployment services - this company is not functionally comparable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. AO/ TPO is then directed to determine Arm s length price of these services based on documents submitted by assessee by determining most appropriate method‟ and Comparability analysis. - ITA No. 1956/Del/2015 And ITA No. 7682/Del/2017 - - - Dated:- 20-6-2019 - SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SMT. BEENA A PILLAI, JUDICIAL MEMBER For The Assessee : Sh. Salil Kapur, Adv. For The Department : Sh. Sanjay I Bara, CIT, D. R. ORDER PER BEENA A PILLAI, JUDICIAL MEMBER Present appeals have been filed by assessee against orders passed by Ld.DCIT, Circle 2(1), New Delhi dated 25.01.2017 for Assessment Year 2012-13 and dated 30/10/2017 for A.Y. 2013-14, on following grounds of appeal: ITA 1956/Del/17 : A.Y. 2012-13 The Appellant submits that each of the grounds is independent and without prejudice to one another. In facts and the circumstances of the case, impugned order is invalid and bad in law inter- alia on the following grounds : 1. Impugned order passed by AO pursuant to directions of Id. Dispute R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That, on the facts and circumstances of the case and in law: 3.1. Ld. A0/DRP/TPO has erred in making an addition of ₹ 5,37,41,148 under section 92CA of the Act to the total income of the Appellant on account of adjustment in the arm s length price ( ALP ) of the international transactions, pertaining to provision of software development services, provision of software deployment services and availing of intra-group services, entered into by the Appellant with its associated enterprises ( AEs ). 3.2. Ld.AO/DRP/TPO have erred in rejecting the economic analysis undertaken by the Appellant by conducting a fresh economic analysis for impugned international transaction pertaining to provision of software development services and provision of software deployment services. 3.3. Ld. AO/DRP/TPO have erred in rejecting certain valid companies and adding certain invalid companies to the final set of comparable companies on irrelevant, unlawful and unjustified reasons. 3.4. Ld. AO/DRP/TPO have erred in conducting a fresh economic analysis by using arbitrary filters and irrelevant criteria for identi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal at any time before or at the time of hearing of the appeal. ITA 7682/Del/17 : A.Y. 2013-14 The Appellant submits that each of the grounds is independent and without prejudice to one another. In facts and the circumstances of the case, impugned order is invalid and bad in law inter- alia on the following grounds : 1. Impugned order passed by AO pursuant to directions of Id. Dispute Resolution Panel( DRP) proceeds on extraneous , irrelevant presumptions / considerations in making unjustified adjustments under chapter X of the act and further in disallowing software license fee and management fees by ignoring to consider relevant and complete facts, hence the same deserves to modified and the additions made to returned income deserve to be deleted being contrary to law, unjustified and bad in law. 1.1 That, on facts and circumstances of the case and inlaw, while passing the assessment order, the learned AO has erred in assessing the total income of the Appellant at ₹ 15,27,28,980 as against returned income of ₹ 8,87,27,609/-. 2 Grounds relating to Corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ria for identifying companies comparable to the Appellant. 3.5. Ld. AO/DRP/TPO have erred in passing an order which has computational errors in the margin of comparable companies used in the determination of the ALP for software development service segment. 3.6. Ld. AO/DRP/TPO have erred in not following the directions issued by the Hon ble DRP, thereby acting in contradiction to the provision of section 144C(13) of the Act. 3.7. Ld.AO/DRP/TPO has erred in using single year data for FY 2012-13 of alleged comparable companies without considering the fact that the same was not available to appellant at the time of complying with transfer pricing documentation requirements and disregarding the appellant s claim for use of multiple year data for computing arm s length price. 3.8. Ld.AO/DRP/TPO have failed to make appropriate adjustments to account for differences in risk profile of the Appellant and further erred in considering certain expenditure as operational/ nonoperational in nature without valid basis. 3.9. Ld.AO/DRP/TPO has erred in disregarding elaborate documentation and evidence submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and after making various adjustment/disallowances, net taxable income of ₹ 8,87,27,610/- was returned. 2.1. As per Form 3 CEB, it was observed by Ld.AO that, assessee during year, undertook international transaction with its associated enterprises, valuing more than 15 crores, and accordingly reference was made to Transfer Pricing Officer (TPO), to determine arm s length price of international transactions in accordance with provisions of section 92 CA of the Income Tax Act, 1961 (the Act). 2.2. On receipt of reference, Ld.TPO issued notice to file documentation as prescribed under Rule 10 D of Income Tax Rules, and other details. 2.3. Ld.TPO observed that assessee is engaged in business of provision of software equipments services, software deployment services, consultancy services, software sub-licensing and AMC activities. It was observed that, in TP study, assessee was broadly held to be carrying out activities under following business segment: Sl. No. International Transaction Amount (in Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Interest on Receivables 4,60,78,357 Total Adjustment 4,91,32,078 Ld. AO thereafter issued notice to assessee regarding software license fees paid to AE amounting to ₹ 1,85,19,216/-. Upon going through details filed by assessee, Ld.AO rejected contentions of assessee and disallowed expenditure claimed. However, Ld.AO granted depreciation at 25%. 4.1. Ld.AO also observed that assessee had shown amount of ₹ 9,79,877/- on account of advances and written off under the head other expenses in P L account. He accordingly called for assessee to provide details to prove income relating to transaction with concerned parties, during any of preceding years with documentary evidence. Ld.AO recorded that since assessee did not furnish any reply in respect of same, addition amounting to ₹ 9,79,877/- was made on account of advances and bad debts written off as disallowed. 5. Aggrieved by additions made by Ld.AO, assessee is in appeal before us now. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urn the impugned order on this score and direct the deletion of addition of ₹ 67.52 lacs made by the Assessing Officer. 7.1 . It has been submitted by both parties that facts and circumstances of this issue are similar with that of Assessment Year 2007-08 relied upon by Ld.Counsel. 7.2. Ld.CIT DR placed reliance upon orders of authorities below. However, could not controvert aforestated observations by this Tribunal in immediately preceding assessment year in assessee s own case. 8. We have perused submissions advanced by both sides in light of records placed before us. 8.1 . It is observed that assessee made payment of ₹ 1,85,19,216/- for software licenses purchased from parent entity. Ld.AO disallowed, considering it to be capital expenditure, and provided corresponding depreciation at 25%. On perusal of order for assessment year 2007-08, it is observed that similar disallowance was made by Ld.AO on license expenses, and factual matrices of this issue as submitted by both parties are similar with that of assessment year 2007-08. DRP has also recorded that this Tribunal in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim of assessee and delete addition made by Ld.AO to extent of ₹ 8,03,982/-. 10.3. Accordingly this ground raised by assessee stands allowed partly. 11. Ground No. 3 are in respect of transfer pricing adjustments made by Ld. TPO. 11.1. Ld.Counsel submitted that following are transfer pricing adjustment disputed by assessee in these grounds: software development services ₹ 30,53,721/- interest on receivables - ₹ 4,60,78,357/-. 11.2. Ground No.3.1-3.8 are in respect of adjustment made to arm s length price of international transaction pertaining to provision of software development service segment. 11.3. Ld.Counsel submitted that Ground No. 3.1 is general in nature and therefore do not require any adjudication. 11.4. Ground Nos. 3.2-3.8 are in respect of rejecting economic analysis undertaken by assessee, rejecting comparables selected by assessee and including certain companies which were functionally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er risks like customer credit risk, market risk, price risk, manpower risk, R D risk, service liability risk. Thus, assessee has been characterised as a routine service provider that assumes limited risk for software development services. It is observed that there is no dispute regarding method applied and PLI at opted for determination of ALP. 12.1. Ld.Counsel submitted that assessee seeks to exclude only 2 comparables which has been included by Ld.TPO as under: * Infosys Ltd * Larsen and Toubro Infotech Ltd ( a) Infosys Ltd. It has also been observed that this company was owning brand and having substantial intangible assets which cannot be held to be suitable comparable for assessee who was only providing software deployment services. It has been submitted that functions of assessee, assets and risk profile has not undergone any change for the year under consideration. Ld.Counsel has also submitted that this company is not functionally comparable to assessee inasmuch as, it is also engaged in software development services and generate substantial revenue from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Broadcom India Research Pvt. Ltd. vs, DCIT (ITA No, 62/Bang/2014) Ld. CIT DR though objected for its exclusion, however, could not controvert regarding unavailability of segmental data. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that Hon ble Delhi High Court in case of Saxo India Pvt.Ltd., (supra) rejected this comparable for nonavailability of segmental data. Further year under consideration Ld.Counsel submitted that segmental data is are unavailable for year under consideration, because of which, comparability cannot be drawn. We therefore, respectfully following Hon ble Delhi High Court , direct Ld.TPO to exclude this comparable from the list. Accordingly this ground raised by assessee stands allowed. 13. Ground no.3.9-3.11: He submitted that assessee benchmarked international transaction of receipt of intra-group services by aggregating same with other international transaction for which Ld. TPO was of opinion that sufficient and contemporaneous documentary evidence to show that services have actually been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o its AE separately. 13.3 . On the contrary, Ld.CIT DR through written submission dated submitted that assessee made payment of ₹ 4.60 crores to its AE towards IGS services received. He submitted that assessee apportioned management fees paid to its AE under four segments, for which there is no basis. Opposing argument advanced by Ld.Counsel regarding acceptance of arm s length price in respect of remaining 3 segments, he submitted that, under each segment, assessee received remuneration for services rendered by it from the AE, whereas management fees been paid by assessee is separately benchmarked as international transaction by assessee itself in its TP study. Ld. CIT DR further submitted that services received from AE for which payment has been made by assessee, is based upon agreement entered into between assessee and Aircom UK, which is placed at page 398-423 of paper book Volume 3. Ld. CIT DR thus submitted that agreement does not categorise services rendered by AE under each of 4 segments. He submitted that apportionment of services under each Segment is not as per the agreement and therefore aggregation of services received from AE cannot be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer 4. Announcement of Change in the organizational structure 5. Announcement of changes in Global Operations Senior Management 6. Announcement of availability of Capesso for ASSET E-mails 14.3 . At this juncture we refer to Rule 10 D which reads as under: Rule 10D. (1) Every person who has entered into an international transaction shall keep and maintain the following information and documents, namely:- . ( d) the nature and terms (including prices) of international transactions entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction: (/) a description of the methods considered for determining the arm's length price in relation to each international transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case; 14.4. It is observed from TP study that assessee has been pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, it can be inferred from above that Aircom UK (AE) allocated its remuneration on percentage basis in respect of each services rendered by it to all its group concerns. And based upon the above, Aircom(UK) entered into agreement with each group concerns. Thus, it is the duty cast upon assessee to establish basis of allocation of services received from AE under each segment and to show, how they are interlinked with each other. It is observed that assessee has not established any basis of apportioning management expenses under all four segments. 14.5. Ld.TPO upon verifying details filed by assessee was of opinion that: * Assessee could not establish whether such services were needed by assessee (i.e. Need Test) * Whether such services are rendered to assesse by AE ( i.e. Rendition test) * Whether assessee has derived any economic or commercial benefit from these services ( i.e. Benefit test) * Basis of allocation keys * These services are duplicative in nature * There is only incidental benefit from these services. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred should be in connection with a benefit or services of facility provided or to be provided to any one or more of such enterprise. The expectation of mutual benefit is important consideration for the acceptance of arrangement for pooling of resources by the enterprises. iv. The enterprises would require that each participant‟s proportionate share of the contribution is consistent with the proportionate share of overall benefits expected to be received from the arrangement. v. Transfer price of cost or expenses allocated or apportioned to such enterprise or contributed by such enterprise shall be determined having regard to Arm‟s length price of such benefit, service or facility received by the enterprise. In order to satisfy the arm‟s length price a participant‟s contributions must be consistent with what an independent enterprise would have agreed to contribute under comparable circumstances considering the benefits it expects to derive from the agreement. 14.8. It is pertinent to note that requirement of services should be judged from viewpoint of assessee as a businessman. Therefore in this regard w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revenue authorities to decide what is necessary for an Assessee and what is not. An Assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question Assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an Assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price of these services based on documents submitted by assessee by determining most appropriate method‟ and Comparability analysis. Accordingly we set aside this issue to Ld. AO. 15. Assessment year 2012-13 ITA No. 1956/Del/2012 15.1. Brief facts of the case are as under: Assessee filed its return of income of ₹ 4,91,40,840/-, on 30/11/12. Case was selected for scrutiny, and notice under section 143 (2) along with questionnaire, and notice under section 142 (1) was issued to assessee. In response to statutory notices, representative of assessee appeared before Ld.AO and filed requisite details as called for. As we have already discussed hereinabove while dealing with Assessment Year 2013-14, assessee is engaged in business of software solution and consultancy services in area of telecommunication. As it entered into international transactions with its Associated Enterprises, Ld.AO referred case of assessee to Transfer Pricing officer. Transfer Pricing Officer upon receipt of reference issued notice under section 92C of the Act, read with Rule 10 B of Income Tax Rules, and directed assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Remarks 1. Acropetal Technologies Ltd. (segmental) Accepted 2. Akshay Software Technologies Ltd. Accepted 3. Cat Technologies Ltd. Different functional profile. Hence rejected. 4. Helios Matheson Information Technology Ltd. RPT less than 25% to total sales: Hence Rejected. 5. Maveric Systems Ltd. Different functional profile. Hence rejected. 6. R.S.Software (India) Ltd. Accepted. 7. Silverline Technolgoies Ltd. Different functional profile. Hence rejected. 8. Cherrytec Intelisolve Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infosys Ltd. 42.15 9. Larsen Toubro Infotech Ltd. (seg.) 27.16 10. Lucid Software Ltd. 11.10 11. Persistent Systems Ltd. 26.92 12. Sankhya Infotech Ltd. 5.68 13. Sasken Communication Technolgoies Ltd. 14.58 14. Spry Resources Pvt.Ltd. 33.59 15. Tata Elxsi 14.32 16. Thirdware Solution Ltd. (Overseas segment) 11.10 17. Zylog Systems Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Name of the Company 1. Zylog Systems Ltd. 2. Cigniti Technologies Ltd. (formerly known as Cigniti). 16.3. Thereafter Ld.TPO proposed following list of comparables which were used for determining arm s length price of international transaction under this segment: Sl. No. Name of the Company OP/OC (%) 1. Acropetal Technologies Ltd. (segmental) 65.92 2. Akshay Software Technologies Ltd. 7.77 3. R.S.Software (India) Ltd. 15.43 4. Cigniti Technologies Ltd. (formerly known as Cigniti) 8.28 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d final assessment order, giving effect to DRP directions. Ld.AO made addition in hands of assessee, on account of license fee paid to its AE. 18.2. In the meanwhile, assessee preferred application before Ld.TPO, under section 154 of Act, post-DRP direction, in respect of Software Development Service Segment, for rectification of mistake, that crept in, while computing margin. Ld.TPO vide order dated 08/11/2017 considered said application and provided benefit of +/- 5% margin to transaction, thereby deleting proposed adjustment made under Software Development Service Segment. 18.3. Thus, adjustments disputed by assessee before us is only in respect of Software Deployment Service segment and IGS. 19. Aggrieved by order passed by Ld.AO, assessee is in appeal before us now. 20. Ld.Counsel submitted, that facts and circumstances for year under consideration are similar with that of assessment year 2013- 14 which has already been decided in foregoing paragraphs of this order. 21. Ld.Counsel submitted that Ground No. 2.1-2.3 is in respect of disallowance made on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd 25.2 . Before undertaking comparability analysis, it is sine qua non to analyse functions performed, assets owned and risks assumed by assessee under software deployment service segment. ( A) Functions: In TP study, it has been submitted that under this segment, employees of assessee are sent outside India for purposes of software deployment. Assessee receives product support request through calls, e-mails or UTS based upon which it provides product support services to any AE or to any customer of AE. It has also been submitted that assessee has specialised team consisting of internal and external product team dedicated to product support activities. The external team deals with AEs or other customers in providing product support services while internal team provides assistance to external team. Assessee in TP study has also submitted that it provides personnel to other AEs on requisition made by Aircom UK and such personnel provided by assessee continue to remain the employees of assessee. It has been submitted that it is the sole discretion of assessee to provide personnel and where assessee is of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umes limited risk under this segment. 26. Based upon the above FAR analysis, we shall now undertake comparability of assessee with that of comparables disputed hereinabove. 26.1 . Mindtree Ltd It has been submitted that this comparable is functionally different with that of assessee and is engaged in provision of comprehensive range of services and software solutions. Ld.Counsel submitted that this company also undertakes significant research and development activities and owns patents in respect of the same. Further during year under consideration, this company underwent a process of amalgamation. 26.2. On the contrary Ld.CIT DR placed reliance upon orders of authorities below. 26.3. We have heard both sides on basis of records placed before us. 26.4 . From the annual report it is observed that this company is engaged in development and sale of software product and owns patents being intangible assets. In present case of assessee under segment of software deployment, it is more of an outsourcing of employees to the customers being its AEs or custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be compared in terms of risks as well as assets owned. Accordingly we direct this comparable to be excluded from the finalist. 28. Infosys Ltd Ld. Counsel submitted that annual report of this comparable has been placed at page 1340 of paper book volume 3 and it is functionally dissimilar with that of assessee as it is engaged in R D activities, owns significant intangible assets. It has also been submitted that this comparable has exceptionally high turnover. Ld. Counsel placed reliance upon assessee s own case for assessment year 2008-09, wherein this comparable has been excluded being functionally dissimilar with that of assessee under this segment. He also placed reliance upon the decision of this Tribunal in case of Alcatel Lucent India Ltd in ITA No. 1112/del/2017 which has been approved by Hon ble Delhi High Court in ITA No. 515/2017, Agilis information technologies international Private Limited (supra), Ajilent Technologies International Pvt.Ltd by Hon ble Delhi High Court in ITA No. 1620/2015, 477 and 6420/2016, Bangalore Tribunal in case of CGI Information Systems in ITA No. 586/BAG/2015. 28.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjected for its exclusion, however, could not controvert regarding unavailability of segmental data. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that Hon ble Delhi High Court in case of Saxo India Pvt.Ltd., (supra) rejected this comparable for nonavailability of segmental data. Further year under consideration Ld.Counsel submitted that segmental data is are unavailable for year under consideration, because of which, comparability cannot be drawn. We therefore, respectfully following Hon ble Delhi High Court , direct Ld.TPO to exclude this comparable from the list. 30. Persistent systems Ltd (SCG) Zylog systems Ltd (SCG) It has been submitted by Ld.Counsel that these comparables were excluded by this Tribunal in assessee s own case for assessment year 2011-12 by observing as under: 21. The Profit and loss account at page 1005 of the paper book shows that under the head Income , sale of software services and products is shown at 6101.27 million and schedule 11 which gives details of sale of software services and produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect for exclusion of htis company from the list of comparables. To avoid repetition, observations made by us highlighting the findings of the Hon'ble Delhi High Court while considering the comparable Persistent Systems Solution Ltd are also applicable in toto here also. 30.1 . On the contrary Ld.CIT DR placed reliance upon observations of authorities below. 30.2. We have perused submissions advanced by both sides in light of records placed before us. 30.3 . It is observed that functions performed by assessee and that these comparables for assessment year 2011-12 and 2012-13 are similar and identical and has not been disputed by both parties. Under such circumstances activities carried on by these comparables has been held to be functionally dissimilar with that of assessee in assessee s own case for preceding assessment years. We therefore do not wish to differ from the aforestated view taken by this Tribunal as there is nothing brought on record to establish a new fact that could lead to a deviation. 30.4. Respectfully following the same, we direct ld.TPO to exclude theses comp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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