TMI Blog2019 (11) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... eeds to be verified by the Revenue. Therefore, it will be appropriate to remand back this entire issue to the file of the TPO/AO for adjudication on merit as well as in light of the decisions of the Hon ble High Court and the Special Bench in case of L G Electronics [ 2013 (6) TMI 217 - ITAT DELHI] Addition in respect of Software Development Services segment (SDS) - comparable selection - Application of various filters - HELD THAT: - The assessee did not dispute the profit margin in case of on-site work which is normally low as compared to offshore work. In the present year also the TPO demonstrated with facts and figures that there is considerable difference between the average rate per hour in the case of offshore projects vis- -vis on site projects. The TPO was right in applying the on-site revenue s filter considering the companies generating more than 75% of their export revenue s from onsite operation. Therefore, this filter was rightly applied. As regards to filter relating to employee cost more than 25% of sales and companies falling less than this threshold have been excluded, the said issue is held in favour of the assessee in assessee s own case for A.Y. 2007-08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support services and market support services segment (MSS) - HELD THAT:- We direct the TPO to take into consideration only those comparables where related party transactions are to the extent of 15% because it is not the case of revenue that by applying the threshold limit of 15%, it will not get sufficient number of comparables. Marketing Support Services Segment - Companies functionally dissimilar with that of assessee need to be deselected from final list. Denial of economic adjustment for difference in Risk profile - HELD THAT:- Computation of risk adjustment as per CAPM model by availing the services of technical experts. The experts of the field are to be appointed by both the sides to come to an acceptable conclusion Addition on account of corporate recharges and reimbursements paid in the nature of Intra Group services - HELD THAT:- From the perusal of the records it can be seen that the additional evidences filed before us and before the DRP has a relevance in deciding this issue. The TPO did not have these documentary evidences at the time of deciding, therefore, it will be appropriate to remand back this issue to the file of the TPO/AO for verifying th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of the DCIT Circle- II, Gurgaon, dated 08/11/2012 u/s 143(3) read with Section 144C of the Income Tax Act, 1961 for Assessment Year 2008-09. 2. Grounds of appeal are as under:- 1. That on the facts and circumstances of the case, the assessment order passed by the Ld. Assessing Officer ( AO ) is bad in law. 2. That on the facts and circumstances of the case and in law, the Ld AO and Ld TPO have erred in re-determining the arm s length price ( ALP ) of the international transactions of the appellant 3. That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was expedient and necessary to refer the matter to the Ld. Transfer Pricing Officer ( TPO ) for computation of the arm s length price, as is required under section 92CA(1) of the Income Tax Act, 1961 ( Act ). 4. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO and Ld. DRP erred in enhancing the income of the appellant by ₹ 2,17,04,89,28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant to identify such companies which are comparable to it in terms of the value chain and position of the Brand / brand profile; 4.6.2 in rejecting comparable companies, viz., Spice Mobiles Ltd.. Bharti Teletech Ltd and General Sales Ltd. from the comparable set used to determine the bright line limit in the appellant s case based on erroneous/ inappropriate reasoning; 4.7. erroneously holding that the appellant has rendered services to the AEs by incurring excessive AMP expenses and by holding that a mark-up has tobe earned by the appellant in respect of the alleged excessive AMP expenses; 4.8. in applying a mark-up of 15% on the alleged excessive AMP expenses, for determining the compensation/ service fee towards alleged AMP service by the appellant to its AHs: 4.9 That the Ld. AO and Ld. TPO, on the facts and circumstances of the case and in law have erred in not following the binding direction issued by the Ld. DRP regarding the inclusion of M/s Spice Mobility Ltd., M/s General Sales Ltd as comparables of the appellant for the purpose of computing the arm s length price of the alleged international transaction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis based on application of the following additional/ revised filters in determining the ALP for the CSD segment; 5.6.1 exclusion of companies whose data for FY 2007-08 was not available; 5.6.2 exclusion of companies with related party transactions ( RPT ) greater than 25% of their sales; 5.6.3 exclusion of companies with export sales that are less than 25% of their total revenue; 5.6.4 exclusion of companies with diminishing revenues/ persistent losses for last three years upto and including FY 2007-08; 5.6.5 exclusion of companies having different financial year ending (i.e. not March 31, 2008); 5.6.6 adopting employee cost to revenues greater than 25% of their total revenues as a search criteria for short listing and evaluating comparables for software development services; 5.6.7 exclusion of companies with onsite revenues greater than 75% of their export revenues for selecting comparables for contract software development services; and rejecting, in particular, the following filters applied by the appellant in its TP documentation/ fresh search: 5.6.8 companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors in accept-reject of comparables and/ or in the computation of the operating profit margins of the comparables; 5.15 That on the facts and circumstances of the case and in law, the Ld. TPO and Ld. AO erred in not following the binding directions issued by the Ld. DRP in respect of re-computing the margins for M/s Softsol Limited and in respect of re computing the margins by keeping out the forex component out of the PLI for both the appellant as well as the comparables 6 That on the facts and the circumstances of the case and in law-, the Ld AO/TPO and the Ld DRP erred in enhancing the income from administrative and marketing support services business segment of the appellant by ₹ 16,62,27,059 on account of an arm s length adjustment and in doing so grossly erred in: 6.1. rejecting comparability analysis in the TP documentation/ appellant s fresh search and in conducting a fresh comparability analysis based on application of the following additional/revised filters in determining the ALP for the administrative and marketing support services segment; 6.1.1 companies having other operating income (ie income other than m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ministrative and marketing support services segment is remunerated on an arm's length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a benchmarking analysis, the appellant undertakes minimal business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the appellant on account of this fact; and 6.9. committing a number of factual errors in accept-reject of comparables and/ or in the computation of the operating profit margins of the comparables; 7 That on the facts and circumstances of the case and in law, the Ld. AO / TPO and the Id DRP erred in determining the ALP of the appellant s international transactions pertaining to payment towards services availed fees/reimbursements to its Associated Enterprises (AEs) as NIL against the sum of ₹ 91,21,40,262/- incurred by the appellant and in doing so have grossly erred: 7.1. by not issuing a show cause notice to the appellant before disallowing the payment towards services availed and reimbursement paid and not giving reasonable opportunity to the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod merely based on presumptions and without furnishing details of price charged in any comparable uncontrolled transaction which is in contravention of the provisions of Rule 10B of the Income Tax Rules, 1962. 8. That on the facts and circumstances of the case and in law. the Ld AO/TPO and the Ld DRP erred in denying the benefit of (+/-) 5 percent range mentioned in proviso to section 92C(2) of the Act while computing the ALP 9. That on the facts and circumstances of the case and in law, the Ld AO/TPO and the Ld DRP erred in disregarding judicial pronouncements in India in undertaking the adjustment while computing the ALP 10. That on the facts and circumstances of the case and in law, the Ld. AO and Ld. DRP erred in disallowing the provision for liquidated damages amounting to Rs, 4,32,06,463/-. 10.1 The Ld. AO and Ld. DRP erred both on facts and in law in holding that the claim for liquidated damages is a liability of future and not liability of present and thus does not represent liability for AY 2008-09. 11. That the Ld. AO and the Ld. DRP in complete disregard to the facts and legal position erred in disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed present appeal. 5. The Ld. AR submitted that Ground Nos. 1 to 3 are general in nature. As regards to Ground Nos. 5.1 to 5.5, 6.1.1, 6.1.2, 6.1.4 and 6.1.5 are not pressed by the Ld. AR. Therefore, Ground Nos. 1 to 3, 5.1 to 5.5, 6.1.1, 6.1.2, 6.1.4 and 6.1.5 are dismissed. 6. As relates to Ground No. 4 regarding addition of ₹ 217.05 Crores made on account of Advertising, Marketing and Promotional ( AMP ) Expenses, the Ld. AR submitted that the TPO proposed a transfer pricing adjustment of ₹ 217,04,89,288 on account of AMP expenses. The TPO computed the AMP/Sales of MSIPL at 28.78% as against average of 0.29% of comparables and determined the excess AMP expenses at 28.49% of sales. He also proposed a mark-up of 15%. At the outset, the Ld. AR submitted that the approach adopted by the TPO and the DRP in respect of the AMP expenditure has come to be known as the Bright line test which has been subject matter of extensive litigation before the Tribunal and the Hon ble High Courts. The Special Bench of this Tribunal in the case of L.G. Electronics [2013] 140 ITD 41 held that excessive expenditure could be treated as a separate internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r foreign group companies) and also pay royalty to the licensor of IP for the exploitation of technology and brand. The licensed manufacturer retains a fair share of the entrepreneurial profits, commensurate with the contributions made towards developing of the non-routine marketing intangibles in India for itself and also makes arm s length compensation to the licensor for exploiting the IP. A licensed manufacturer thus incurs AMP expenses to benefit itself in the capacity of the economic owner of the brand and not the legal owner or licensor of the brand. Intensity of functions performed by the licensed manufacturer around AMP has a relevance on other related international transactions entered into by the licensee with the overseas licensor e.g. payments made to the licensor under the license agreement. Particularly if the payment of royalty and import of raw materials is independently tested for arm s length, there is no additional benefit flowing to the licensor by way of AMP expense. Such AMP expenses cannot be an item for being subject to a separate adjustment on a standalone basis. Motorola is a globally well-known name in consumer goods industry and the strength of the bran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p between independent enterprises. Further, even if the parties prematurely terminate the arrangement, the question of compensating the taxpayer for any loss is suffered due to excess AMP spend would arise only at the time of such premature termination and not during the pendency of the distributorship arrangement Thus, in case of a routine distributor, disallowance/adjustment on account of AMP spend on the mere assumption that the supplier may terminate the agreement in the future is not sustainable. A taxpayer cannot be penalized on the presumption of a future event (which may not even occur) while ignoring the present facts and circumstances. If during the course of transfer of the legal rights in the brand, the license enjoyed by the distributor is not terminated or impaired in any way, by the new legal owner of the brand, then the distributor should not ideally be entitled to a compensation for such transfer. Also, in such circumstances, the price payable by the buyer of the brand to the seller might be on the lower side, in case a significant value stands associated with the economic ownership thereof in the hands of the distributor. On the other hand, if during the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profit margins of the comparable companies as mandated under law. In view of the above, it was submitted that it would be erroneous to treat AMP as a separate international transaction and any attempt to benchmark such an imaginary transaction in any manner (whether as bundled transaction or on a stand-alone basis) would be an exercise in futility. The Ld. AR relied upon the decision in case of M/s. Moet Hennessy India Private Ltd. Vs. ACIT (ITA No.85/Del/2015) in which ALP adjustment on account of AMP expenditure was deleted because no material was brought on record by the Revenue apart from applying the Bright Line Test and by taking the view that the taxpayer had incurred huge AMP/ Sales expenses to the tune of 18.14%. No cogent material was there to treat the incurring of AMP expenses as international transaction more particularly when basis for treating the AMP expenses as international transactions i.e. BLT was not sustainable method. Further, BLT as a method was disregarded in the case of Nikon India Pvt. Ltd. vs. DCIT (ITA No.6870/Del/2018). The Hon ble Delhi High Court in Sony Ericsson (supra) has also laid down the permissibility and desirability of set-off between AL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase price adjustment from its AEs. The Assessee has supporting evidence for credit notes of ₹ 3,465,141,270 in the form of credit notes / vouchers/ copies of the Foreign Inward Remittance Certificates. An application under Rule 18 read with Rule 29 of the ITAT Rules has been filed requesting admission of additional evidence which comprised of sample credit notes and Foreign inward remittance certificates. Again, attention is drawn to the order of the Tribunal for AY 2007-08 in assessee s own case (ITA no. 5637/Del/2011) wherein this contention was accepted by the Tribunal. Further, the contention of the assessee in respect of credit notes was recorded by the TPO in the order and was not controverted (or commented upon) either by him or the DRP. 7. The Ld. DR relied upon the order of the TPO, DRP and the Assessment Order. The Ld. DR submitted that the TPO rightly pointed out that arrangement between two AEs for allocation or apportionment of or any contribution to any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises is an international transaction. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is issue has been remanded back by the Tribunal. The Tribunal held as under: 10. It is noticed that the Tribunal, at the time of passing the order, had benefit of Special Bench decision in the case of LG Electronics (supra). Following such decision, the Tribunal restored the issue of AMP expenses to the TPO/AO to be decided afresh in the light of the ratio laid down by the Special bench decision and also giving certain specific directions. Thus, it is vivid that the entire AMP issue was not thrown open at large before the TPO to be decided de novo. But there was a specific direction to deal with the issue in a particular manner. It is but natural that when the Tribunal restored the matter to the TPO/AO for deciding certain issues concerning AMP expenses in a particular way, while holding it to be an international transaction, the authorities could not have entertained the argument of the assessee that the AMP expenses be treated as not an international transaction. Such a contention, if accepted, would have made the order of the Tribunal unworkable, which the lower authorities were rightly not competent to do. In our considered opinion the DRP has rightly followed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's own case for AY 2007- O8 (ITA no. 5637/Del/2011). Further the Ld. AR submitted that the pricing model of the assessee with its AEs suitably compensates the Assessee for the alleged excess AMP expenses. This fact was submitted before the TPO vide submission dated 05 August 2011 to TPO. Pursuant to the Group s Global Transfer Pricing policy, during FY 2007-08, the Assessee received credit notes of ₹ 3,465,141,270 as a cost credit/ purchase price adjustment from its AEs. The Ld. AR further submitted that the Assessee has supporting evidence for credit notes of ₹ 3,465,141,270 in the form of credit notes / vouchers/ copies of the Foreign Inward Remittance Certificates. An application under Rule 18 read with Rule 29 of the ITAT Rules has been filed requesting admission of additional evidence which comprised of sample credit notes and Foreign inward remittance certificates. Again, attention is drawn to the order of the Tribunal for AY 2007-08 in assessee s own case (ITA no. 5637/Del/2011) wherein this contention was accepted by the Tribunal. Further, the contention of the assessee in respect of credit notes was recorded by the TPO in the order and was not controver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions Software Development services TNMM OP/TC 6,35,07,41,416 The Ld. AR submitted that there is no change in the functions undertaken by the assessee company, application of filters and benchmarking analysis undertaken by the assessee company from the previous year. The assessee identified 16 comparable companies with the mean OP/TC margin of 11.66% against the margin of the assessee company at 8.22%. (5.10% before voluntary adjustment). Thus, the international transactions with respect to SDS segment were considered to be at arm s length. The Ld. AR submitted that the TPO rejected the TP study prepared by the assessee company stating that the quantitative filters are not correct, selection/rejection of comparables based on qualitative filter of functionally different is not objective and uniform, data for the current year is not used, non-application of filters such as onsite revenue, employee cost and export sales. The TPO rejected the multiple year data adopted by the assessee in his TP study. Based on the additional/modified filters the TPO conducted a fresh compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s filter was rightly applied. 10.3 As regards to filter relating to employee cost more than 25% of sales and companies falling less than this threshold have been excluded, the said issue is held in favour of the assessee in assessee s own case for A.Y. 2007-08 wherein it has been held that the employee cost/sales of the assessee is 65% and hence a range of 50% to 80% should be applied instead of the threshold limit of 25% as applied by the TPO. In A.Y. 2008- 09, the employee cost ratio of the assessee for the SDS segment is 45% and hence a range of 30% to 60% should be applied instead of 25% threshold filter as applied by the TPO as per the submissions of the Ld. AR. The Ld. DR relied upon the order of the TPO and the directions of the DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 10.4 We have heard both the parties and perused all the relevant material available on record. The situation remains same in this Assessment Year as well, therefore, this filter is wrongly applied by the Revenue. Hence we direct the TPO/AO to apply a range of 30% to 60% as it will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the submissions of the revenue before us. 10.10 We have heard both the parties and perused all the relevant material available on record. The Tribunal in A.Y. 2007-08 held as under: 81.1 We have considered the submissions of both the parties and have perused the record of the case. We are in agreement with ld. TPO s observations that for creating intellectual property rights, R D is required but the converse is not true i.e. each company spending on R D automatically is not towards creating an IPR. We are also in agreement with the observation of ld. TPO that R D activity in a software development company is to improve the processes in delivering the software development services and not for creating an intangible. But at the same time the submissions of ld. Counsel for the assessee that profitability of companies having intangible is more cannot be lost sight off. If a company is having brand then it is definitely in a better position to command higher profits. Ld. Counsel in his submissions has pointed out that companies having patent had incurred substantial sums on R D to develop its own products. Thus, both sides have their logical view point. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 10.12 We have heard both the parties and perused all the relevant material available on record. The factual aspect is identical with that of A.Y. 2007-08 in the present assessment year. Therefore, in similar like application of this filter will have to be seen case by case basis in this year. Hence this filter can be applied subject to proper analysis mentioned in order of the Tribunal in A.Y. 2007-08 (para 81.1). 11. Thus, Ground No. 5.6 is partly allowed for statistical purpose. 12. As regards to Ground No. 5.7 relating to denial of economic adjustment for difference in working capital, the Ld. AR submitted that the TPO has given the benefit of working capital adjustment in the previous year. Hence, it should be provided in the current year also as there are no change of facts. The Ld. AR further pointed out that the TPO had himself offered to provide the working capital adjustment in show cause notice, however, the same was not provided in the final order. The Ld. AR relied upon the decision in case of Nokia India Private limited (ITA 551 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the TPO has given the benefit of working capital adjustment in the previous year and there is no change in the factual aspect in the present assessment year as well. Therefore, Ground No. 5.7 is allowed. 15. Ground No. 5.8 to 5.11 are relating to inappropriate comparable companies selected by the TPO/AO in respect of Software Development Services Segment which are challenged by the assessee. The Ld. AR submitted that as regards to Software Development Services segment, the assessee is contesting 15 comparables which should be rejected. Now we take up each of the comparables. 15.1 Kals Information Systems Ltd. (Seg.) :- The Tribunal in assessee s own case rejected the comparable on account of different asset base in A.Y. 2007-08. Assets base of the company in this year also is only ₹ 40.26 lakhs which is very miniscule as compared to assessee which is ₹ 288.2 crores. This is a product based company as well. As per the Annual Report, Kals is engaged in the business of software services and software products. It further shows that there is consumption of software inventory as an expenditure which implies that the company is into trading of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Ltd. ITA No. 393/2016 and 394/2016 as well as the decision of the Tribunal in case of Mentor Graphics (India) Pvt. Ltd. vs. DCIT for A.Y. 2008-09 and 2009-10 (ITA No. 410/Del/2013 and ITA No. 1484/Del/2014). 15.5 The Ld. DR relied upon the order of the TPO and DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 15.6 We have heard both the parties and perused all the relevant material available on record. Infosys has a diversified business profile and owns various software products. The Company possesses brand value which tends to influence the pricing policy of the company and thereby directly impacting the margins earned by the company. This company has tangible assets which is many times of that of the assessee. The risk levels for Infosys are quite high as against minimal for the assessee. The company has incurred significant expenditure on research and development activities. The company s expenditure on advertisement and marketing is 4.66% on sales, i.e. which exceeds 3% of sales filter applied by the assessee. Therefore, this company cannot be held as co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies reporting superlative performance with high revenue growth and sky rocketing profitability. The annual report of the company for AY 2007-08 provides the abridged financial data which does not provide the detailed financial information. Wipro has a diversified business profile and owns various software products. Thus, it is functionally different comparable than the assessee company. Wipro has substantial intangible assets in form of goodwill which is valued by the company at ₹ 42209 crore. During the year under consideration there was merger of Wipro Infrastructure Engineering Limited, Wipro Healthcare IT Limited, Quantech Global Services Limited with Wipro Limited. The Ld. AR relied upon the Hon ble Delhi High Court decision in case of Toluna India Pvt. Ltd. ITA No. 393/2016 and 394/2016, Ciena India Pvt. Ltd. vs. DCIT (ITA No. 3324/Del/2013 for A.Y. 2008-09) as well as the decision of the Tribunal in case of Mentor Graphics (India) Pvt. Ltd. vs. DCIT for A.Y. 2008-09 and 2009-10 (ITA No. 410/Del/2013 and ITA No. 1484/Del/2014). 15.11 The Ld. DR relied upon the order of the TPO and DRP and further submitted that the findings and reasoning given by the reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd. ITA No. 393/2016 and 394/2016 as well as the decision of the Tribunal in case of Mentor Graphics (India) Pvt. Ltd. vs. DCIT for A.Y. 2008-09 and 2009-10 (ITA No. 410/Del/2013 and ITA No. 1484/Del/2014). 15.14 The Ld. DR relied upon the order of the TPO and DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 15.15 We have heard both the parties and perused all the relevant material available on record. The company is in the business of Hardware design and employs a wide variety of personnel such as hardware engineers, styling and mechanical designers, graphic designers, animators and special effects artists. Thus the company is not engaged in pure software development activity unlike the assessee. Besides that R D activities undertaken by the Tata Elxsi resulted in the creation of the Intellectual properties (I). Further, the company s R D expenses of 3.39% on sales fails the R D filter of 3% applied by the assessee in the TP documentation. Net fixed assets to sales ratio in case of Tata Elxsi is 246% (approx.). Thus, this comparable company is not only f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2009-10 (ITA No. 410/Del/2013 and ITA No. 1484/Del/2014). 15.20 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 15.21 We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that this company is engaged in the business of software product development and owns products. Besides this, the complete annual report is not available in public domain. The Tribunal in Mentor Graphics (India) Pvt. Ltd. vs. DCIT for A.Y. 2008-09 has also excluded this comparable. Thus, it will be appropriate to exclude this comparable in the present assessee s case as well. Therefore, we direct the TPO to exclude this comparable from the list of final comparables. 15.22 Persistent Systems Ltd.: This comparable is rejected by the DRP in assessee s own case for A.Y. 2007-08 which is confirmed by the Tribunal. The company has been rejected because there was restructuring in the business of Persistent Systems, in light of the same this company should be rejected. It s a pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on record. It is pertinent to note that this comparable company is engaged in various kinds of activities and does not have segmental results in its financials. Besides that the TPO has not considered that this company has abnormal increase in revenue. Therefore, we direct to the TPO to exclude this comparable company form the final list of comparables. 15.28 Bodhtree Consulting Ltd.:- As per the decision of the Tribunal in case of Aircom International (India) Pvt. Ltd. (AY 2008-09 ITA No. 6402/Del/2012), the company is engaged in providing open and end to end web solutions, software consultancy, design and development of solutions. Also, the Tribunal has noted the faulty revenue recognition approach of the company which makes it non-comparable to the assessee. Further, as recognized by the Tribunal in Dialogic Networks (India) Pvt. Ltd. (AY 2008-09 ITA No. 7280/Mum/2012), company is engaged in providing Data Management and Data warehousing services which are classified as ITES and also, during the year the company has undergone restructuring activity by hiving off its e-paper business. Thus, it is functionally non comparable. The Ld. AR also relied upon the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition. The company owns intangibles in form of copyrights and software which is being used by the company for rendering of services unlike assessee. The company is engaged in Research and Development activities as well. The Ld. AR relied upon the decision of the Tribunal in case of Aircom International (India) Pvt. Ltd. Vs. DCIT for AY 2008-09 (ITA No. 6402/Del/2012). 15.35 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 15.36 We have heard both the parties and perused the material available on record. There is acquisition during the year which is an extra ordinary event and has a financial impact. Besides that this company is also involved in R D activities which are different from what the assessee company is doing. Therefore, we direct the TPO to exclude this comparable from final list of comparables. 15.37 Thirdware Solutions Ltd.:- This comparable is functionally different. This company is engaged in diversified business including software products and segmental is not available. The com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 15.45 We have heard both the parties and perused all the relevant material available on record. This company is engaged in various activities and functionally different than the assessee company. Therefore, we direct the TPO to exclude this comparable company from the final list of comparables. 15.46 We further note that since there is only two comparable left in the final list of the comparables selected by the TPO/DRP. Hence, the matter is remanded back to Assessing Officer /TPO to decide afresh by giving new set of comparables (including two comparables which are not challenged by the assessee) which are functionally similar to the Assessee company and the segmental data including other filters of the TPO are met with. Needless to say, the assessee will provide the new set of comparables which will be verified by the TPO and thereafter adjudicate the issues at length. 15.47 Thus, Ground No. 5.8 to 5.11 are partly allowed for statistical purpose. 16. As regards to Ground No. 5.13 relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,042,365,420 Arm s length margin B 21.85% 21.85% Arm s Length Price C=A*B+A 7,362,622,264 7,362,622,264 Price charged by the Assessee D 6,350,741,416 Price charged by the Assessee (After making voluntary adjustment of INR 188,124,307 in the return of income) D 6,538,865,723 Amount of adjustment E=C-D 1,011,880,848 823,756,541 20. The Ld. DR relied upon the order of the TPO as well as the Assessing Officer. 21. We have heard both the parties and perused all the relevant material available on record. From the perusal of the records it can be seen that there is error in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that this is wrongly applied by the TPO / DRP as the issue is covered in favour of the assessee in assessee s own case for AY 2007-08 (ITA No. 5637/DEL/2011). The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 24. We have heard both the parties and perused all the relevant material available on record. The facts remain similar in the present assessment year, therefore, we direct the TPO to take into consideration only those comparables where related party transactions are to the extent of 15% because it is not the case of revenue that by applying the threshold limit of 15%, it will not get sufficient number of comparables. Thus, Ground No. 6.1 is partly allowed. 25. As regards to Ground No. 6.1.6 and 6.1.7 relating to appropriate filter of R D =3% applied by Assessee in TP documentation but wrongly rejected by the TPO/AO is covered by the decision of the Tribunal in assessee s own case for A.Y. 2007-08. The Ld. AR submitted that the Tribunal partly held in favour of the assessee in assessee s own case for A.Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 28.2 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 28.3 We have heard both the parties and perused all the relevant material available on record. The company is Government of India enterprise and has a turnover of 353.14Cr. There is no separate segmental information and all the receipts have been classified under the primary segment of Consultancy services . Thus, this company cannot be taken as comparable as it is functionally different. Besides this, there is no separate segmental information available. Therefore, we direct the TPO to exclude this comparable from the final list of comparables. 28.4 IDC (India) Ltd.:- The Tribunal assessee s own case in A.Y. 2007-08 remanded back this comparable company to the file of the TPO. The TPO accepted the contention of the assessee and vide order dated 21.01.2016 rejected the said comparable as functionally different to that of the assessee company. This year also the company has same functional profile and is engaged in providing consulting services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. 28.10 Apitco Ltd.:- The company operates in the diversified activities which includes Asset Reconstruction and Management Services, Project Related Services, Micro Enterprise Development, Infrastructure Planning and Development, research studies Tourism, Skill Development, Environment. The Ld. AR relied upon the decisions of the Tribunal in case of Alcatel Lucent India Ltd. vs. ITO for A.Y. 2008-09 (ITA No. 2154/Del/2014), Corning SAS-India Branch Office vs. DDIT for A.Y. 2008- 09 (ITA No. 5713/Del/2012), Fujitsu India Pvt. Ltd. vs. DCIT for A.Y. 2008-09 (ITA No. 6280/Del/2012) and Ciena India Pvt. Ltd. vs. DCIT for A.Y. 2008-09 (ITA No. 3324/Del/2013). 28.11 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 28.12 We have heard both the parties and perused all the relevant material available on record. The company operates in the diversified activities which includes Asset Reconstruction and Management Services, Project Related Services, Micro Enterprise Development, Infrastructure Planning and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revenue authorities be taken as the submissions of the revenue before us. 28.15 We have heard both the parties and perused all the relevant material available on record. The company is majorly engaged into consultancy services. The major source of income for the company is from consultancy income and contract income. Further, this company is Public Sector Company wholly owned by the Govt. of India and such companies cannot be compared with the assessee company. Therefore, we direct the TPO to exclude this company from the list of final comparables. 28.16 Choksi Laboratories Ltd.:- The company is a commercial testing house engaged in testing of various products, offers services in the field of pollution control as allied activity and produces effluent treatment plants. Further, from the fixed assets schedule of the company, it is evident that major assets are instruments. Thus, the company is providing testing services with the help of these instruments. The Ld. AR relied upon the decisions in case of Brown Forman Worldwide LLC India vs. DDIT for A.Y. 2007-08 and 2008-09 (ITA No. 433 6139/Del/2012), Corning SAS-India Branch Office vs. DDIT for A.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jects. The company s revenue streams include effluent treatment, common solid waste treatment and management. Thus, it is functionally different than the assessee company. Therefore, we direct the TPO to exclude this company from the final list of comparables. 28.22 Indus Technical and Financial Consultants Ltd.:- As per the website of the company, the company is engaged in providing high-end technical services in the areas of environment pollution control, technology management, financial services, administrative legal services, project selection project implementation services, energy power services, etc. and manufacturing of TMT Bars. Its commission expense constitutes Approx 30% of its sales. Furthermore, this company has a very small asset base of just 44.58 lakhs and its turnover is 1.13 crores. 28.23 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 28.24 We have heard both the parties and perused all the relevant material available on record. This company is engaged in providing highen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables selected by the TPO/DRP. Hence, the matter is remanded back to Assessing Officer /TPO to decide afresh by giving new set of comparables (including the one which is not challenged by the assessee) which are functionally similar to the Assessee company and the segmental data including other filters of the TPO are met with. Needless to say, the assessee will provide the new set of comparables which will be verified by the TPO and thereafter adjudicate the issues at length. 28.28 Ground No. 6.3, 6.4, 6.5 and 6.6 are partly allowed for statistical purpose. 29. As regards to Ground No. 6.8 relating to denial of economic adjustment for difference in Risk profile, the same is covered by the order of the Tribunal in assessee s own case for A.Y. 2007-8 (ITA No. 5637/DEL/2011). The Ld. DR could not controvert this aspect. Therefore we find that this issue to be restored to the file of the AO/TPO to consider the computation of risk adjustment as per CAPM model by availing the services of technical experts. The experts of the field are to be appointed by both the sides to come to an acceptable conclusion. Thus, Ground No. 6.8 is partly allowed for statis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal amount in the current year 622,140,262 290,000,000 Software Development segment (A) 368,386,758 33,582,060 Administrative and Marketing Support Services segment (B) 207,918,476 827,435 Total (A) +(B) 576,305,234 34,409,495 Balance amount to be considered 45,835,028 255,590,505 The above expenses allocated to the SDS and MSS segments have been recovered by the Assessee from the AE with mark up of 8.22% and 3.53% respectively amounting to a total of ₹ 65 crores approximately out of a total expense of ₹ 90 crores. In the case of Ciena India (P.) Ltd. v. ITO ITA 1453 (Delhi) of 2014, it was held that no addition is warranted in respect of international transaction, the cost of which is recovered from the AE under a cost-plus approach. The Ld. AR submitted that this is because reduction of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow each method is to be applied. The Ld. AR further submitted that a part of the expenses claimed to be valued as nil are in the nature of cost reimbursements. The TPO has not controverted this fact. It has been accepted that the cost to cost transactions amounting to INR 290,000,000 are without any mark-up. The Ld. AR submitted that these are third party expenses that have been recharged on a cost to cost basis. No adverse finding has been recorded by the TPO/DRP on this. Hence, in this scenario, it cannot be arm s length behaviour that the any independent company would incur expenses through unrelated enterprises and would not charge these expenses back to the beneficiary entity. 32. The Ld. DR relied upon the order of the TPO/AO/DRP. The Ld. DR further submitted that since the TPO/AO/DRP does not have access to these additional evidence, it will be appropriate to remand back the issue to the file of TPO/AO. 33. We have heard both the parties and perused all the relevant material available on record. From the perusal of the records it can be seen that the additional evidences filed before us and before the DRP has a relevance in deciding this issue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and is offered to tax as income. 35. The Ld. AR submitted that the fact that outflow has happened towards damages levied on the contract itself shows that the provisions made are genuine. The Ld. AR submitted that the Assessing Officer is incorrect in stating that provision for liability is a liability de future and not a liability de praesenti. The Assessee has a present liability because the event i.e. default in execution of the contract has happened due to which outflow of resource is expected and an estimate of such outflow can be made. Hence, it is an allowable expenditure. In the contracts entered into by the Assessee, the clause on liquidated damages clearly fixes amount of liquidated damages in delay and therefore liability of the Assessee to pay accrues immediately upon delay and such liability is fully ascertainable. 36. The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 37. We have heard both the parties and perused all the relevant material available on record. The Tribunal for A.Y. 2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in regard to liquidated damages. Therefore, this decision is of no assistance to the revenue. 170.1 The next decision relied upon by ld. DR is in the case of Navjivan Rollar Flour Pulse Mills Ltd. (supra). In this case, the assessee company was engaged in the business of manufacturing of dal, besan, suji etc. On 23/07/1986, the assessee had entered into a contract with a foreign company for the import of yellow gram. Under the contract letter of credit were to be opened latest by 14/08/1986. The assessee, failed to open letter of credit. Protracted litigation ensued. The foreign party claimed damages for breach of the contract. The assessee disputed the payment of damages. There was no stipulation in the contract notes regarding the damages to be paid by the party breaching the terms of the contract. The Arbitrator on 25th May, 1987 awarded certain damages under the arbitration agreement. The assessee challenged the legality of the arbitration award and preferred appeal before the Board of appeal constituted by the Grain and Free Trade Association, which gave decision against the assessee on 20/03/1989. For the A.Y. 1988-89 the assessee claimed deduction on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the fact that liability would be discharged at a future dated and, there is difficulty in estimating the correct amount thereof would not convert this definite and absolute liability into conditional one as has been held by the Hon ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC), Metal Box Company India Ltd. v. Their Workment [1969] 73 ITR 53 (SC) and Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC). . In the present case, the works have been executed after the expiry of the stipulated period. The stipulation as to the payment of liquidated damages towards delay in executing the contract work is related to the contract work, revenue thereof has been accounted for in the year under consideration. Although exact quantification of the claim of liquidated damages may be made at a future dated, the assessee payer was, in obligation to pay liquidated damages for the delay in work did accrue on the date when the delay was first occurred and continued upto the date of completion of the work, and thus, in computing the profit and gains derived by the taxpayer from such contract works in the present year, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amway India Enterprises v. Dy. CIT [2008] 21 SOT. 179. In the result, this ground is allowed for statistical purpose. The Assessee claimed software expenses (comprising of AMCs, software purchases with less than 1 year life and software upgrades) amounting to ₹ 2,63,02,168/- as revenue expenditure while computing its tax liability for the year. The Assessing Officer disallowed the above expenditure alleging it to be capital in nature but allowed depreciation. Further, the DRP has not given any finding on this issue. It is the Assessee s case that these software expenses do not have a benefit of permanent or enduring nature and, therefore, are not a capital asset. These are only for updating and maintaining the existing software. It is pertinent to note that issue is identical. Therefore it will be appropriate to remand back this issue to the file of the TPO/AO. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 11 is partly allowed for statistical purpose. 42. Ground No. 12 is relating to addition of ₹ 101,611,386 on account of disallowance of deduction under section 10A/10B. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmed in PCIT v. Agilisys IT Services India (P) Ltd. [2018] 96 taxmann.com 374 (Bom. HC) iv) Austin Medical Solutions Pvt. Ltd. vs. ITO (TS-348-ITAT-2015, Bang. Tri.) v) iGate Global Solutions Ltd. (ITA No. 453/2008 Karn. HC 2014) vi) iGate Global Solutions Ltd. v ACIT (24 SOT 3, 2008, Bang. Tri.) The Ld. AR further submitted that delay in filing CA certificate is a mere procedural delay and the claim of the assessee (if otherwise allowable) may not be denied on this ground. The Ld. AR relied upon the following decisions: i) ITO v Lepide Software Pvt. Ltd. (ITA No. 5455/Del/2012) 2013 (Del.Tri) ii) CIT vs. Mantec Consultants (P) Ltd. (178 Taxman 429) (Del. HC) iii) CIT vs. American Data Solutions India (P.) Ltd. [2014] 223 Taxman 143 (Kar.) iv) ITO vs. Com Lab India [2015] 41 ITR (T) 641 (Hyd. Tri.) v) Cloud Softech India (P) Ltd. v. ITO (IT Appeal No. 483(HYD) of 2013) vi) Worley Parsons India (P.) Ltd. vs. DCIT (IT Appeal No. 273 (HYD) of 2016) 43. The Ld. DR relied upon the order of the TPO/AO/DRP. 44. We have hear ..... X X X X Extracts X X X X X X X X Extracts X X X X
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