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2019 (11) TMI 408

..... tax treaty, hence, not eligible for any relief under section 90 - HELD THAT:- Section 40(a)(ii) of the Act says that any rate or taxes levied on the profits or gain in any business or profession would not be allowable as deduction. Explanation-1 to section 40(a)(ii) of the Act inserted by the Finance Act, 2006, w.e.f. 1st April 2006, further clarifies that any sum eligible for relief of tax either under section 90 or 91 of the Act would not be allowable as deduction under section 40(a)(ii) of the Act. It is the say of the assessee that the tax eligible for relief under section 90 of the Act are only those taxes which are levied by Federal / Central Government and not by any local authority of State, City or County. Thus, it is ineligible for any relief under section 90 of the Act. The aforesaid submissions of leaned Sr. Counsel for the assessee, prima facie, is acceptable if one has to strictly go by the meaning of “tax”, defined under section 2(43) of the Act, as it only refers to tax paid under the provisions of the Act. Pertinently, unlike section 91 read with Explanation-(iv), section 90 does not provide for inclusion of tax levied by any State/ local authority of t .....

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..... espect of income on which the assessee has not paid tax in India, still, it would be eligible for tax credit under section 90 of the Act. Like Article 25 of the Indo-USA treaty, treaties with various other countries such as Indo-Denmark, Indo-Hungary, Indo-Norway, Indo-Oman, Indo-US, Indo-Saudi Arabia, Indo-Taiwan also have similar provision providing for benefit of foreign tax credit even in respect of income not subjected to tax in India. However, Indo-Canada and Indo-Finland treaties do not provide for such benefit unless the income is subjected to tax in both the countries. Therefore, the foreign tax credit would be available to the assessee in all cases except the foreign tax paid in Finland and Canada. The Assessing Officer is directed to grant credit accordingly. Addition made on account of provision of interest free loans provided to the AEs - HELD THAT:- After considering the submissions of the parties and examining the material on record, we are convinced that various submissions made by the assessee before learned Commissioner (Appeals) have not at all been dealt with. The primary contention of the assessee that the advance made to the AEs is in the nature of quasi equit .....

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..... nderstood as defined for the purpose of section 80 HHE. It was further held that thus the expenses which are to be excluded from the export turnover, would also have to be excluded for the purpose of computing total turnover. TDS u/s 195 - Disallowance of commission paid to non-residents under section 40(a)(i) - HELD THAT:- No material has been brought on record by the Assessing Officer to demonstrate that the non-resident agents either have any business connection in India or have PE in India so as to bring the commission payment within the tax net. The factual finding recorded by learned Commissioner (Appeals) that the non-resident agents have rendered the services in their respective countries and do not have either any business connection in India or any PE in India has not been controverted by the Revenue. Further, the nature of payment viz. commission has also not been disputed by the Revenue. That being the case, since the commission paid to the non-resident agents is not chargeable to tax in India at their hands, there is no necessity for the assessee to withhold tax under section 195(1) of the Act on such payment. Accordingly, we uphold the decision of learned Commissioner .....

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..... mitted by the assessee that the State taxes paid in USA and Canada do not come within the purview of section 40(a)(ii) of the Act. According to the assessee, the term tax as defined under section 2(43) of the Act, would mean the tax chargeable under the Income Tax Act, 1961. Further, it was submitted, in respect of State taxes paid, the assessee is not eligible for any relief either under sections 90 or 91 of the Act r/w the applicable Double Taxation Avoidance Agreements (DTAAs). Further, referring to the applicable DTAAs, it was submitted, the State and local taxes levied by local authorities like State, Cities or Counties are not covered under the tax treaties / conventions with USA and Canada. Thus, it was submitted, the deduction claimed by the assessee is not disallowable under section 40(a)(ii) of the Act. The Assessing Officer, however, did not find merit in the submissions of the assessee. He observed, the expression tax under section 40(a)(ii) of the Act would encompass all taxes levied on the profit or gains of the business or profession and is not limited to tax levied on total income computed under the provisions of Indian Income Tax Act. Referring to various judicial .....

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..... the applicable tax treaties it is covered by the provisions of section 90 of the Act. Hence, the State taxes paid by the assessee are covered under section 40(a)(ii) of the Act. 6. We have considered the rival submissions and perused the material on record. From the stage of the assessment proceeding itself, it is the claim of the assessee that the term tax , as defined under section 2(43) of the Act would only include taxes chargeable under the Indian Income Tax Act. It is the further case of the assessee that since in respect of the State taxes paid overseas, the assessee is not eligible to claim relief under section 90 or 91 of the Act, it will not be covered under section 40(a)(ii) of the Act. On a perusal of provisions of sub-section (43) of section 2 of the Act, it becomes clear that the term tax has been defined to mean any tax paid under the provisions of the Act. Section 40(a)(ii) of the Act says that any rate or taxes levied on the profits or gain in any business or profession would not be allowable as deduction. Explanation-1 to section 40(a)(ii) of the Act inserted by the Finance Act, 2006, w.e.f. 1st April 2006, further clarifies that any sum eligible for relief of ta .....

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..... , we direct the Assessing Officer to verify whether the State taxes paid by the assessee overseas are eligible for any relief under section 90 of the Act and if it is not found to be so, assessee s claim of deduction should be allowed. In view of our decision above, no separate adjudication of grounds no.1.2 is required. 7. In ground no.2, the assessee has challenged disallowance of expenditure incurred for purchase of software by invoking the provisions of section 40(a)(i) of the Act. 8. Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed expenditure incurred in respect of purchase of software called upon the assessee to furnish the necessary details. On verifying the details furnished by the assessee, he found that the assessee had purchased software for its internal use amounting to ₹ 47,36,54,498, and for trading purpose amounting to ₹ 31,03,03,823. After perusing the details, the Assessing Officer was of the view that the amount paid towards acquiring software brought along with support service is in the nature of royalty as per section 9(i)(vi) of the Act. In this context, he referred to Explanation-3 to .....

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..... t by Finance Act, 2012, with retrospective effect, Revenue cannot fasten the liability of TDS on the assessee as the assessee cannot be expected to deduct tax at source in respect of a transaction effected long time back anticipating such amendment. In this context, he relied upon the following decisions:- i) NGC Networks India Pvt. Ltd. v/s CIT, ITA no.397/2015 (Bom.); and ii) Channel Guide India Ltd., ITA no.1221/Mum./2006, dated 29.08.2012. 11. Further, he submitted, Explanation-4 to section 9(1)(vi) of the Act, does not apply to section 40(a)(i) of the Act which specifically refers to Explanation-2 to section 9(1)(vi) of the Act for the definition of royalty. For such submission, he relied upon the following decisions:- i) NGC Networks India Pvt. Ltd. v/s CIT, ITA no.397/2015 (Bom.); and ii) Sonata Information Technology Ltd. v/s DCIT, 7 SOT 465 (Mum.). 12. The leaned Sr. Counsel for the assessee submitted, even the payment made towards purchase of software cannot be treated as royalty under the tax treaties as the definition of royalty therein is narrower than the definition in the Act. Referring to Article-12 of Indo-US Tax Treaty, he submitted, the payment made for a copyrig .....

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..... as the expenditure incurred on the software products acquired in internal use, we, on a perusal of the facts on record are of the view that by incurring such expenditure, the assessee has acquired assets of enduring benefit. Therefore, the expenditure incurred is capital in nature and the assessee would be entitled for depreciation on the cost of such assets. The Tribunal while deciding identical issue in assessee s own case for the assessment year 2005-06 in ITA no.7513/Mum./2010, dated 4th November 2015, the Tribunal has expressed similar view. Thus, following the aforesaid view of the Tribunal in assessee s own case, we uphold the decision of learned Commissioner (Appeals) on the issue. Insofar as the disallowance of expenditure incurred on acquiring software products for re-sale / trading purpose, it is noted that the Assessing Officer has not at all deliberated on the factual aspect of the issue. Simply relying upon certain judicial precedents and the statutory provisions, he has concluded that the payment made by the assessee for acquiring these software is in the nature of royalty as per section 9(1)(vi) of the Act, hence, assessee is liable to deduct tax at source under se .....

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..... for the purpose of trading is a copyrighted article and the assessee has sold it to the customers as it is. It has been submitted that while re-selling / trading the software products, there is neither any transfer of right in copyright in favour of the assessee nor the assessee has transferred any right in the copyright. However, the learned Commissioner (Appeals) has recorded a categorical finding that the software products acquired by the assessee cannot be sold independently and can be sold by utilising in the package developed by it. In the aforesaid factual context, it requires examination whether the software products acquired by the assessee for trading purpose was sold as a chattel qua chattel or the assessee has made some value addition to it or has transferred the copyright relating to the software product along with the software product. No doubt, in assessee s own case for assessment year 2005-06, the Tribunal in ITA no.7513/Mum./2010, dated 23rd March 2017 (after recall of the original appeal order) while dealing with similar issue has held that the payment made by the assessee towards acquiring the software products is not royalty as the assessee has sold a copyright .....

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..... 377; 39,69,25,798, towards advertisement. After calling for necessary details, he found that the expenditure incurred are for advertising in newspapers/magazines, holding events/seminars, conferences, exhibitions, etc., advertising at airports, global campaign etc.. Thus, mostly, the expenditure incurred was for promotional/publicity activities of the assessee. After considering the submissions of the assessee in the context of facts and material on record, the Assessing Officer was of the view that out of the expenditure incurred of ₹ 1,88,28,573, towards advertisement in newspapers / magazines, expenditure to the extent of 50% can be treated as revenue and non-brand building expenditure. Accordingly, out of the total expenditure, the Assessing Officer treated an amount of ₹ 38,75,11,510, as expenditure incurred towards brand building, hence, capital in nature. Having held so, the Assessing Officer observed that 1/5th of the expenditure amounting to ₹ 7.75 crore would be allowed in the current year and the balance 80% amount to ₹ 31,00,09,210, would be amortized over the period of next three years in equal proportion. The assessee challenged the aforesaid d .....

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..... support his contention, the learned Senior Counsel sought the permission of the Bench to furnish certain documents as additional evidence under rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. The leaned Sr. Counsel submitted, the additional evidences submitted by the assessee may be admitted and the issue may be restored back to the Assessing Officer for fresh consideration. 22. The learned Departmental Representative while relying upon the observations of the Assessing Officer with regard to the ground raised by the Revenue submitted that the issue relating to assessee s claim of deduction in respect of expenditure incurred towards experience certainty may be restored to the Assessing Officer for fresh adjudication in view of the additional evidence filed by the assessee. 23. We have considered rival submissions and perused the material on record. We have also carefully examined the case laws cited before us. On a detailed analysis of facts on record, we have noted that the reasoning of the Assessing Officer that the expenditure was incurred for brand building is without any basis. It is to be noted, before the Departmental Authorities the assessee had demonstrated tha .....

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..... xperience certainty expenditure of ₹ 5.28 crore. The decision of learned Commissioner (Appeals) on this issue is modified to this extent only. 24. As regards ground no.4, the leaned Sr. Counsel submitted that the assessee has already got the desired relief in the order passed by the Assessing Officer while giving effect to the first appeal order. Thus, he submitted, the ground has become academic. In view of the above, ground no.4, is dismissed. 25. Ground no.5, is not pressed, hence dismissed. 26. In ground no.6, corresponding to ground no.7 of Revenue s appeal, the assessee has claimed foreign tax credit in respect of income pertaining to section 10A/10AA of the Act eligible units in India. 27. Brief facts are, in the course of assessment proceedings the assessee furnished countrywise statement of tax paid in support of its claim of tax credit under section 90 and 91 of the Act amounting to ₹ 93,48,94,709. It was contended by the assessee that the tax paid on income charged to tax outside India and in India would be eligible for deduction in terms of the applicable tax treaties as well as under section 91 of the Act. The Assessing Officer after examining the claim of .....

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..... ncome from the total profit. However, such income is chargeable to tax in India as per the provisions of section 4 and 5 of the Act. He submitted, the exemption under section 10A / 10AA of the Act is for a specified period and after expiry of that period such income would otherwise be chargeable to tax. Referring to article 25 of Indo-U.S. DTAA, the leaned Sr. Counsel submitted, the condition mandated in the treaty is that if any income derived and tax paid in USA on such income then tax relief / credit shall be granted in India of such tax paid in USA. He submitted, the aforesaid article does not speak of any income tax being paid by the resident assessee under the Indian Income Tax Act as a condition precedent for claiming the benefit of tax credit under DTAA. He submitted, like article 25(2)(a) of India-USA DTAA, similar clause also appear in various other tax treaties concluded by the Government of India with foreign countries from which the assessee has received income under section 10A / 10AA of the Act till assessment year 2009-10, such as, Denmark, Finland, Hungary, Norway, Oman, South Africa, Saudi Arabia, Taiwan. In this context, he drew our attention to the relevant clau .....

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..... the issue is, as per the decision of Hon ble Karnataka High Court in Wipro Ltd. (supra), the foreign tax credit benefit under section 90(1)(a)(ii) of the Act would only be applicable under Indo-US DTAA and would not be applicable to other DTAA countries and non-DTAA countries. On a careful reading of the decision of the Hon ble Karnataka High Court in Wipro Ltd. (supra), it is noted, while dealing with identical issue the Hon ble Court held that in the cases covered under section 90(1)(a)(ii) of the Act, it is not the case of income being subjected to tax or the assessee has paid tax on the income. The provision applies to a case where the income of the assessee is eligible to tax under the Act as well as in the corresponding law in force in the other country. The Court observed, though, income tax is chargeable under the Act, it is open to the Parliament to grant exemption under the Act from payment of tax for any specified period, normally, to incentivize the assessee the to carry on manufacturing activities or providing services. The Court thereafter referring to the treaty provisions with USA held that it is not the requirement of law that the assessee before he claims credit .....

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..... an outstanding loan of U.S. $ 92,50,000 against TCS, Singapore, part of which was re-paid by the AE on 12th December 2008, and on 25th November 2008. When the Transfer Pricing Officer called upon the assessee to show cause why the adjustment in respect of interest chargeable on the interest free loan should not be made at appropriate market rate, it was submitted by the assessee that since the loan provided are in the nature of equity infusion, no interest has been charged. Further explaining, it was submitted that the objective of advancing the loan was mainly to acquire downstream companies and further infusion of capital by the AE to other companies as well as entering into joint venture with overseas parties. It was submitted, the assessee is not in the business of lending and borrowing money and the loans advanced by it are quasi equity in nature. Therefore, no interest has been charged and the loans have been provided to further the interest of the assessee and not to assist the AEs in any way. The Transfer Pricing Officer, however, did not find merit in the submissions of the assessee. He observed, unduly the assessee has extended loan to its AEs without charging any interes .....

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..... submitted, TCS Singapore was also in similar position and the loan was for acquisition of downstream subsidiary. He submitted, in all these cases, the assessee has taken strategic decision for acquisition of entities and had decided it to route it through its AEs and accordingly advanced loans to the AEs for further acquisition. Thus, he submitted, the advancement of loan to the AEs being a shareholder s activity, the adjustment made has to be deleted. In support of his contention, the learned Sr. Counsel placed strong reliance upon the decision of the Tribunal, Delhi Bench, in DLF Holdings Ltd. v/s DCIT, ITA no.6336/Del./2012, dated 30th June 2016. 36. The learned Departmental Representative submitted, the entire loan cannot be treated as quasi equity as they were also for working capital purpose. He submitted, in similar uncontrolled transaction, certainly interest would have been charged. Therefore, the Transfer Pricing Officer was justified in determining the arm s length price of interest on interest free loans. Thus, he submitted, the decision of the learned Commissioner (Appeals) on the issue should be sustained. 37. We have considered rival submissions and perused the mater .....

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..... he amount advanced by the assessee is in the nature of loan and has to be benchmarked as such. After considering the submissions of the parties and examining the material on record, we are convinced that various submissions made by the assessee before learned Commissioner (Appeals) have not at all been dealt with. The primary contention of the assessee that the advance made to the AEs is in the nature of quasi equity and falls within shareholder s activity has not been properly addressed by the Departmental Authorities keeping in view the ratio laid down in the relevant case laws. It also requires deliberation whether it can be considered as an international transaction under section 92B r/w Explanation-1(c). Since, the aforesaid legal and factual aspects have not been considered properly, we are inclined to restore the issue to the file of the Assessing Officer for de novo adjudication after due opportunity of being heard to the assessee. The Assessing Officer must examine all relevant facts to find out the exact nature of the advances made to the AEs. He should also examine the applicability of the ratio laid down in the case of DLF Hotel Holdings Ltd. (supra) and any other case .....

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..... al transaction as per section 92B of the Act as the guarantee transaction does not constitute purchase, sale or lease of either tangible or intangible property. It also does not have any bearing on the profits, income, losses or assets and does not include any cost apportionment. He submitted, guarantee also does not tantamount to lending or borrowing of money. It also does not constitute provision of intra group chargeable services. He submitted, it is only a shareholder service which is enjoyed by the AEs just being a part of the group. In support of such contention, he relied upon a number of judicial precedents. Without prejudice, the learned Sr. Counsel for the assessee submitted, if at all, guarantee commission should be charged @ 0.5%. In this context, he relied upon the decision of the Hon'ble Jurisdictional High Court in CIT v/s Everest Canto Cylinders Ltd., [2015] 378 ITR 57 (Bom.). Further, he relied upon the decision of the Tribunal in WNS Global Services Pvt. Ltd. v/s ITO, ITA no.7378/Mum./ 2012, dated 16th January 2019. 42. The learned Departmental Representative relying upon the observations of the Transfer Pricing Officer submitted, the guarantee fee charged by .....

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..... ee was claiming deduction under section 80HHE of the Act. He observed that after opting out of section 80HHE of the Act for the assessment year 2001-02, the assessee started claiming benefit under section 10A of the Act. Thus, holding that the assessee is not eligible to claim benefit under section 10A of the Act, the Assessing Officer disallowed the same. The assessee challenged the disallowance before the first appellate authority. 50. Learned Commissioner (Appeals) noticed that similar claim made by the assessee in assessment year 2005-06, though, disallowed by the Assessing Officer, but was subsequently allowed by the first appellate authority and such decision of the first appellate authority was also upheld by the Tribunal. Accordingly, learned Commissioner (Appeals) allowed assessee s claim. 51. The learned Departmental Representative though relied upon the observations of the Assessing Officer, however, he fairly submitted that the issue has been decided in favour of the assessee in assessment year 2005-06. 52. The learned Sr. Counsel for the assessee submitted, the decision of the Tribunal in assessment year 2005-06 has also been upheld by the Hon'ble Jurisdictional Hi .....

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..... that would be denied to the assessee. The only embargo was not to give relief under both the provisions." 7] Coming to the revenue s second objection to the assessee s claim of deduction under section 10A of the Act, we may recall, that the assessee had admittedly started manufacturing computer software for export prior to 1st April 2001, when section 10A was substituted by the Finance Act of 2000. It was under this amendment that the profit and gains derived by an undertaking from export of computer software came to be covered for deduction under section bA. The revenue contends that this benefit would not be available to an industry which was already existing and engaged in such activity. However, the interpretation of the revenue would render the first proviso to subsection (1) of section 10A wholly redundant. This proviso reads as under:- "10A(1)Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this .....

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..... the Act, the assessee submitted that these commissions were paid outside India to non-resident agents operating outside India. It was submitted, these commissions were paid in respect of services performed / delivery by the non-resident agents outside the territory of India in respect of assessee s export business. The Assessing Officer, however, did not find merit in the submissions of the assessee and disallowed the commission paid of ₹ 20,23,55,367 under section 40(a)(i) of the Act due to non-deduction of tax at source. While deciding assessee s appeal on the issue, learned Commissioner (Appeals) observed that the payment made towards commission is in the nature of pure contract / project related payment without any further business connection between the parties to the transactions. The payment has been made to the non-residents for getting contracts in their country of residence. On factually verifying the issue, learned Commissioner (Appeals) found that non-resident agents did not have any business connection in India. Since, the remittances were not in the nature of interest, royalty and fees for technical services, learned Commissioner (Appeals) held that at best the .....

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..... ding technical services, but is providing software development services, however, the Assessing Officer was not convinced with the submissions of the assessee and concluded that a part of the foreign currency expenditure can be linked to provision of technical services. So, estimating such expenditure in respect of provision of technical services @ 30%, he reduced it from the export turnover while computing deduction under section 10A of the Act. While deciding assessee s appeal on the issue, learned Commissioner (Appeals) following the decision of the Tribunal in assessee s own case rendered in assessment year 2005-06, directed the Assessing Officer to reduce the foreign currency expenditure both from export turnover as well as the total turnover. 8. We have considered rival submissions and perused the material on record. Notably, identical issue came up for consideration before the Tribunal in assessee s own case in assessment year 2005-06 (supra). The Tribunal while deciding the issue has held that foreign currency expenditure has to be reduced both from the export turnover as well as total turnover. The aforesaid decision of the Tribunal has been upheld by the Hon'ble Juris .....

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..... s and maintaining customer relationship. The assessee carries out software development services in India. It is stated that the assessee has rendered software development, technical and consultancy services to its AEs on the basis of specific request received from them. While benchmarking the international transaction in the transfer pricing study report, the assessee considered itself as the tested party claiming itself to be a limited risk bearing service provider whereas the activities performed / undertaken by the AEs are more complex in nature. To determine the arm s length price of the transaction with AEs, the assessee selected Transactional Net Margin Method (TNMM) as the most appropriate method with operating profit / operating cost (OP/OC) as the profit level indicator (PLI). The assessee selected thirteen comparables with weighted average PLI of 9.80% as against the PLI of the assessee shown at 33.35%. Thus, the price charged for the transaction with AEs were claimed to be at arm's length. Additionally, the assessee also computed the margin earned from the AEs @ 27.15% to net margin earned from both, AEs and non-AEs. Since, the margin earned from AEs was higher, the .....

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..... ppeals) also proceeded to examine the alternative benchmarking provided by the assessee by considering the respective AEs as a tested parties and after a detailed analysis he accepted such benchmarking and directed the Assessing Officer to make adjustment accordingly on the basis of comparables finally selected by the first appellate authority. Being aggrieved with the aforesaid observations of learned Commissioner (Appeals), both, the assessee as well as the Revenue are in appeal before the Tribunal. 15. Revenue s grounds basically are against the decision of learned Commissioner (Appeals) on the appropriate PLI to be applied, consideration of costs incurred by the AEs, alternative benchmarking submitted by the assessee considering the AEs in different geographical locations as tested parties along with comparables situated in those geographical locations. Whereas, the grounds raised by the assessee are on selection of the tested party and some other ancillary issues. 16. However, at the outset, learned Sr. Counsel for the assessee, submitted, if the grounds raised by the Department are decided against it, there would be no need to adjudicate assessee s grounds. In view of the afo .....

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..... act part of the work to the assessee. Therefore, ignoring the major cost of the work done in the execution of the contract would be contrary to the FAR analysis as a risk bearing distributor. He submitted, the AEs are risk bearing entities including credit risk. Therefore, the cost of TCS in sub-contracting is not pass through cost that can be ignored unlike a commission agent. He submitted, the comparables selected by the Transfer Pricing Officer also have similar costs. However, while computing their margin such costs have not been ignored. In view of the aforesaid, the role of AEs cannot be viewed as a routine marketing service provider as has been held by the Transfer Pricing Officer. He submitted, that in information technology industry, the value / profit driven organization which can bring any business is as important and significant as the delivery function. Accordingly, the AEs do perform significant function and assume distribution and marketing risk. Therefore, the cost of sub-contracting cannot be ignored while determining the PLI as is the case with all the comparables. The learned Sr. Counsel submitted, there is no dispute on the geographical region comparables relati .....

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..... ss at net level which signifies that some risk is being borne by the AEs. It has further been brought on record that the manpower base of AEs performed various functions relating to marketing as well as client co-ordination. The AEs have developed sufficient competency to handle the marketing work independently. The entire contract related work is performed by the AEs, though, in cooperation with the assessee. Thus, it is quite natural that for being a sufficiently motivated work force, the AEs are compensated at return on sales and not merely on value added costs. Therefore, learned Commissioner (Appeals) was justified in directing the Transfer Pricing Officer to adopt the PLI of gross margin on sales. As regards consideration by the Transfer Pricing Officer, the outsourcing / sub- contracting cost to assessee as a pass through cost, learned Commissioner (Appeals) was absolutely correct in observing that the decision of the Transfer Pricing Officer to exclude such costs while computing the margin of the AEs is incorrect. When similar cost incurred by the comparables were not excluded while computing their margin, a different treatment cannot be given to such costs in case of the A .....

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