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TMI Blog2020 (2) TMI 347X X X X Extracts X X X X X X X X Extracts X X X X ..... re not in accordance with the law, made in violation of the principles of equity and natural justice and are contrary to the facts and circumstances of the present case. 2. Adjustment under section 92CA of the Act 2.1. The Honourable DRP and the Learned AO/TPO have erred, in law and on facts, in making an adjustment of INR 154,43,05,770, with respect to the international transactions of rendering Information Technology Enabled Services ("ITES") and Software Development Services ('SWD'), to the taxable income of the Appellant and holding that the said international transactions were not at Arm's Length Price ("ALP") as defined under section 92F(ii) of the Act. 2.2. The Honourable DRP and the learned AO/TPO have erred in law and on facts in rejecting, without appropriate reasons, the detailed benchmarking analysis conducted by the Appellant and embarking on a fresh search for comparables with respect to the SWD and ITES segment with modified filters. 2.3. The Honourable DRP and the learned AO/TPO erred in fact and in law in determining the Arm's Length Price ("ALP") by adopting the financial data for a single year (i.e. the financial year 2013-14) of the comparables as agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. 3. Other TP Grounds . 3.1. The Honourable DRP and the Learned AO/TPO erred in law and on facts in upholding the arms length margin arrived at by the Learned TPO by considering the lower range of 3 percent from the mean margin as allowed under the Act and the Rules. 4. Disallowance under section 14A of the Act 4.1. Then Honourable DRP has erred in law and on facts in upholding the disallowance of Rs. 2,01,750 under section 14A of the Act read with Rule 8D of the Rules in connection with the investment of funds largely made in its group companies. 4.2. The Honourable DRP and the Learned AO have erred in law and on facts in disallowing an amount of Rs. 2,01,750 under section 14 A of the Act by mechanically applying Rule 8D when there is no basis to reject the Appellant's claim that no expenditure was incurred for earning exempt income . 4.3. The Honouralbe DRP and Learned AO have erred in law and on facts in not considering the contention of the Appellant that there was no exempt income earned in the first place and consequently no expenditure could have been incurred for earning exempt income during the relevant AY and hence the applicability of section 14A of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e pertaining to 'other payables' 7.1 The Honouralbe DRP and Learned AO have erred in law and on facts in disallowing an amount of Rs. 5,91,20,000 under section 40(a)(i)/(ia) of the Act. 7.2.The Honouralbe DRP and the Learned AO have erred in law and on facts in disallowing an arbitrary amount equal to 10 percent of the 'other payables'as appearing in Note 3.5 of the financial statements of the Appellanty, under section 40(a)(i)/(ia) of the Act. 7.3. The Honourable DRP and the Learned AO have erred on facts in holding that the entire amounts appearing in 'other payables' are provisions for expenses created at the end of the year, even though the Appellant had submitted the reconciliation of the said payables into provisions created at the end of the year and creditors for expenses, on which taxes have been appropriately deducted at the time of accrual of expenses, wherever applicable. 7.4.The Honourable DRP and the Learned AO have erred on facts in holding that the Appellant has not withheld taxes on year-end provisions despite the Appellant providing a spreadsheet capturing the relevant details of TDS on year-end provisions (like the name and PAN of the vendor, description ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve of assessee appeared before Ld.AO, and filed books of account and other details as called for. 2.1. Ld.AO observed that during the year under consideration assessee entered into international transactions with its associated enterprises in respect of software development services and IT enabled services and accordingly the case was referred to Transfer Pricing officer. Ld.TPO upon receipt of reference called for economic details of international transaction in Form 3 CEB. From details filed, Ld.TPO observed that assessee is a subsidiary of Goldman Saschs (Mauritius) LLC and Goldman Sachs (Mauritius) NBFC LLC, which were held by Goldman Sachs Group Inc. Ld.TPO observed that assessee had entered into following international transaction with its associated enterprises: International transactions Amount received/receivable (in INR) Amount paid/payable (in INR) IT Enabled Services 11,59,23,08,564/- IT services 7,57,31,26,744/- Campus rechargers 4,10,89,743/- Issue of equity shares 2,08,78,560/- Share premium received 3,05,66,21,184/- Reimbursement of expenses 2,29,06,37,234/- Recovery of expenses 9,54,22,397/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td 18.06% 3. Microland Ltd 20.07% 4. BNR Udyog Ltd (Seg.) 25.08% 5. Crossdomain solutions Pvt.Ltd. 21.07% Average margin 22.34% Ld.TPO, thus computed proposed adjustment being shortfall in arms length price for ITES segment at Rs. 64,40,32,300/-. 2.6. Ld.AO then issued draft assessment order under section 143 (3) read with 92CA of the Act on 22/12/17 and made transfer pricing adjustment at Rs. 1,51,90,58,100/-, as suggested by Ld.TPO under section 92CA of the Act. In the draft assessment order Ld.AO also made disallowance under section 14A read with R 8D(iii) amounting to Rs. 2,01,750/-, leave encashment and bonus claimed was disallowed under section 43B at 33% amounting to Rs. 25,40,056/- and Rs. 20,01,73,768/- respectively. 2.7. Ld.AO disallowed of provision for expenses under section 40 (a) (i)/(ia) for non-deduction of tax at source pertaining to other payables. And disallowance of 10% ad hoc basis under section 40 (a) (i)/(ia) in respect of payables to related parties. Assessee thereafter filed objections before DRP against draft assessment order, challenging TP adjustment and other additions computed by Ld.AO. 3. DRP while passing their order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ES segment. Before we undertake comparability analysis of comparables alleged by assessee, it's sine qua non to understand functions performed, assets owned and risks employed by assessee under these segments. 4.2.In TP study, it has been submitted that, assessee provides IT services and IT enabled services to its group companies. Assessee is engaged in building and maintaining the local information technology infrastructure and assists global teams in supporting the technology environment and usage. 4.2.1. IT segment (SWD) Functions Assessee provides to its group companies following services under this segment:-under this segment the same is aligned to application development for the securities, IMD, Federation, banking, legal compliance and audit divisions. * Providing support in developing, maintaining and enhancing support for various applications and data warehouses as part of global team and working closely with their counterparts to support various divisions internally such as: ➢ securities division technology (equity, FICCI, sales and data services, prime services except) ➢ IMD technology division; ➢ Federation technology division (operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ike computer equipment office equipment furniture's and fixtures etc for running the day-to-day affairs of business. Risks assumed: It has been submitted that, assessee do not own any risks and group companies being associated enterprises, assumes full risk in terms of contract, credit, market, price, quality capacity utilisation risks. As assessee works on cost plus basis and the remuneration received by assessee is in foreign exchange, it has to bear a limited foreign exchange fluctuation risk. Further, assessee employees its own human resources being the vital resource of the company and therefore incurs costs or recruiting training and retraining employees. Therefore employee risk is also borne by assessee. Assessee has been therefore characterised as assuming less than ordinary risks in course of providing contract services to its associated enterprises. Based upon above FAR of assessee under both segments, we shall now analyse the comparables alleged by assessee for exclusion/inclusion under the segments. 5. Ground No. 2.4 is challenging inclusion of certain comparables by Ld.TPO under SWD and ITES segment as under: 5.1. For exclusion in SWD segment: * Infosys Ltd * ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his company should be remanded by following the view taken by coordinate bench of this Tribunal in case of CGI Information Systems and management consultants (P) Ltd. vs DCIT reported in (2019) 101 Taxmann.com 294. We have perused submissions advanced by both sides in light of records placed before us. Ld.CIT DR placed reliance on decision of CGI Information Systems and management consultants (P) Ltd. vs DCIT (supra), wherein this Tribunal observed and decided as under: "9. In respect of the applicability of this Tribunal order for exclusion of Larsen & Toubro Infotech Ltd, this has been submitted by ld. AR of assessee in the chart submitted before us that on page no. 698 of Annual Report paper book, this company has debited an amount of Rs. 27,10,89,274/- as cost of bought-out items for resale. But this fact was not brought to the notice of the Tribunal in the case of Advice America Software Development Center (P.) Ltd. (supra). It has also been submitted that on page no. 706 of Annual Report paper book, this has been reported that this company is engaged in sale of services to its related parties and this fact was also not brought to the notice of Tribunal in case of Advice A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of this company should be examined by Ld.AO/TPO afresh. Accordingly, we set aside this comparable back to Ld. AO/TPO. 5.1.3. Persistent Systems Ltd., This comparable was included by Ld.TPO and opposed by assessee. Ld.AR submitted that this company is functionally different with that of assessee, as it is involved in providing complete product life cycle service to its clients. It has been submitted by Ld.AR that this company specializes in software products, services and technology innovations. He referred to the information furnished by this company under section 133(6), which is placed at page 3020 of paper book wherein this company is identified to be carrying out services in telecom to telecom and wireless clients, life science and health care, infrastructure and systems. On the contrary, Ld.CIT DR submitted that, this company should be remanded by following the view taken by coordinate bench of this Ttribunal in case of CGI Information Systems and management consultants (P) Ltd. vs DCIT reported in (2019) 101 Taxmann.com 294. We have perused submissions advanced by both sides in light of records placed before us. The decision relied upon by Ld.CIT DR in case of CGI In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m sale of products has been given as; export of software services has been recorded to be at Rs. 20194.37, software services from local units amounting to Rs. 414.07, revenue from subscription and training amounting to Rs. 59.32 and sale of licenses amounting to Rs. 7.98. We therefore reject the contention of assessee that segmental details are not available in respect of this comparable. In our view Ld.TPO has considered the export of software service segment for purposes of comparability with that of assessee (refer computation of margin for this comparable at page 55 of order passed by Ld.TPO). Respectfully following decision of Hon'ble Delhi High Court in case of Steria India Ltd vs DCIT (supra) we do not find any infirmity in the view of authorities below in including this company. Accordingly, we uphold the inclusion of this comparable to the finalist. For exclusion in ITES segment 5.2.1.Infosys BPO Ltd It has been submitted that this comparable has been included by Ld.TPO and has been objected by assessee. Ld.AR submitted that, this company is functionally different with that of assessee, as it is engaged in diverse business activity such as sourcing and procurement, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R submitted that that this comparable was rejected by DRP in assessee's own case for assessment year 2011-12, which was upheld by this tribunal wide its order dated 16/01/17 in ITA (TP) A No. 267/B/2015, is placed at page 3324 of paper book caselaw compilation-1 Is observed from annual report of this comparable placed at page 1044-1181 of paper book volume 3 that segmental reporting of this company has been provided. It is observed that assessee has earned revenue from IT enabled services amounting to Rs. 32,512 Lakhs and Ld.TPO while computing the margin of this company has taken income at Rs. 34,903 lakhs. We therefore reject submissions of Ld.AR that, entity level revenue was considered by Ld.TPO for purposes of computing its margin. Further we have perused the orders passed by this Tribunal in assessee's own case for assessment year 2011-12 wherein this tribunal has upheld its inclusion. We observe that similar is the circumstances observed for year under consideration as has been noted by this tribunal in assessee's own case for assessment year 2011-12. Under such circumstances we do not find any reason to deviate from the same and this comparable is directed to be retained i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT DR submitted that these companies may be sent back to Ld.AO/TPO for due verification due to contradictions in respect of annual report. 6.2.2. We have considered the submissions advanced by both sides in light of records placed before us. In our opinion Ld.AO shall verify that annual reports filed by assessee in respect of these comparables and then ascertained the comparability with that of assessee. It is observed that in respect of these 2 comparables revenue is generated from software services as well as products. If the segmental details could be ascertained in respect of software services then these comparables may be considered afresh for purposes comparability with that of assessee in accordance with law, keeping in mind that assessee is a captive service provider that operates at low risk levels. Accordingly these comparables are set aside to Ld.AO/TPO. 6.3. CAT technologies Pvt.Ltd Ld.AR submitted that the assessee prayed for inclusion of this company before DRP. However, DRP rejected the prayer of the assessee for the reason that this comparable is noted to have exclusive business in medical transcription, training software development and consultancy services w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware development services. He placed reliance upon decision of coordinate bench of this Tribunal in case of LG Soft India Pvt. Ltd., in ITA (TP) A No. 3122/Bang/2018. On the contrary Ld.CIT DR placed reliance upon orders of authorities below. We have perused submissions advanced by both sides in the light of the records placed before us. The only reason for excluding this comparable by the authorities below is for the reason that RPT transactions have not been reported in the annual report. We have perused the decision of this Tribunal in case of LG soft India private limited (supra) wherein on similar reasoning Ld. TPO had excluded this comparable therein and this Tribunal observed as under: "12. We find force in the contentions of Ld. ar. If the annual report of this company does not mention about related party transactions, then the assessee cannot be held responsible to prove a fact relating to a 3rd party, which may or may not exist. We notice from auditors report of M/s.I2T2 India Ltd., that the auditor in paragraph 5 (b) of Annexure to the auditors report has mentioned as under:- "There are no transactions that are made enterprises exceeding Rs. 5 Lacs in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal that working capital adjustment should be allowed on actuals. It has been submitted that all relevant details for computation of working capital was provided to AO/DRP which has been disregarded. He placed reliance upon the decision of coordinate bench of this Tribunal in case of Huawei Technologies India Pvt. Ltd vs JCIT reported in (2019) 101 taxman.com 313, wherein it has been held that the working capital has to be granted in actual. 7.2. On the contrary, Ld.CIT DR placed reliance upon orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us including the decision relied upon by Ld.AR in case of Huawei Technologies India Pvt.Ltd vs JCIT (supra). A reading of Rule 10B(l)(e)(iii) of the Rules read with Sec. 92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 7.2. Chapters I and III of OECD Transfer Pricing Guidelines c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) ♦ This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts in suppliers" 7.4. The reverse applies to huge accounts payable. By having high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information is insufficient, it is beyond the power of Assessee to produce correct information about comparable companies. Revenue on the other hand has sufficient powers u/s.133(6) to compel production of required details from comparable companies. If this power is not exercised to find to get information required, then it is no defense to say that Assessee has not furnished required details to deny any adjustment on account of working capital differences. Therefore this objection of DRP is not sustainable. Therefore in, endeavor should be made to bring in comparable companies for the purpose of broad comparison and working capital adjustment claimed by Assessee should be analysed, keeping in mind, OECD guidelines (supra). 7.9. Based on the above discussions, and respectfully following decision of coordinate Bench of this Tribunal in the case of Huawei Technologies India (P.) Ltd. (supra), we direct working capital adjustment to be computed and to allow as per actuals, after considering exclusion/inclusion of comparable companies in the final set of comparables as discussed hereinabove. Accordingly this ground raised by assessee stands allowed. 8. Ground No. 4 raised by assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that as assessee failed to produce documents during assessment proceedings and did not comply with various notices issued to comply with the requirements called for by Ld.AO, additional evidence could not be accepted at the stage of 2nd appellate proceedings. 9.3. We have perused submissions advanced by both sides in light of records placed before us. On perusal of order passed by DRP, it is noted that assessee had filed various documents which was called for by ACIT however the same has not been considered. Assessee's is really filing these documents before this Tribunal to consider claim of leave encashment and bonus paid to employees in accordance with law. We do not find any reason not to allow request of Ld.AR, as it is in consonance with principles of natural Justice. We therefore admit the additional evidence filed by assessee and send it back to Ld.AO for verification. Ld.AO shall verify the documents filed by assessee and consider the claim as per law. Needless to say that proper opportunity must be granted to assessee of being represented. Accordingly, these grounds raised by assessee stands allowed for statistical purposes. 10. Ground No. 7-8 is in respect of di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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