TMI Blog2020 (2) TMI 347X X X X Extracts X X X X X X X X Extracts X X X X ..... ble companies chosen. If we appreciate the argument advanced by Ld.CIT DR, there would remain no comparables for the purpose of comparibility analysis to determine ALP of an international transaction, and this would be fatal to entire exercise of transfer pricing analysis. Regarding comparable companies, one has to fall back upon only on information available in public domain. If that 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. Based on the above discussions, and respectfully following decision of coordina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ran, Accountant Member And Smt. Beena Pillai, Judicial Member For the Appellant : Sri. Sarath Rao, C.A For the Respondent : Ms. Neera Malhotra, CIT DR ORDER PER BEENA PILLAI JUDICIAL MEMBER : Present appeal has been filed by assessee against final assessment order dated 29/10/18 passed by JCIT Special Range-3 Bangalore, on following grounds of appeal: 1. The assessment order passed by he Learned Joint Commissioner of Income-tax, Special Range-3 ( AO ) passed under section 143(3) read with section 144C of the Income tax Act, 1961 ( the Act ), the order of the Learned Transfer Pricing Officer ( TPO ) issued under section 92CA of the Act and the directions of the Honourable Dispute Resolution Panel ( DRP ) issued under section 144C(5) of the Act for the Assessment Year ( AY ) 2014-15, in so far as it is prejudicial to the interests of Goldman Sachs Services Private Limited ( GSSPL or the Appellant ), are 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ▪ Helios Matheson Information Technology Limited; ▪ R Systems International Limited; ▪ Sasken Communication Technologies Lmited; ▪ Exilant Technologies Private Limited; ▪ Daffodil Software Limited; ▪ 12T2 India Limited; ▪ Sankhya Infotech Limited; ▪ AvaniCimcon Technologies Limited; ▪ CAT Technologies Limited; ▪ Ace BPO Services Private Limited; ▪ Caliber Point Business Solutions Limited; ▪ Informed technologies India Limited; and ▪ Jindal Intellicom Limited 2.6. The Honourable DRP and the Learned AO/TPO erred in computing the operating margins of the comparable companies at higher levels than actuals. 2.7. The Honourable DRP and the Learned AO/TPO have erred in not appreciating that the Appellant, being a captive service provider, Operates at lower risk levels as compared to comparable companies, which carry higher risks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence to justify that the payment of leave encashment was actually made, even thought the Appellant had submitted the following evidences: i. A list containing the Permanent Account Numbers ( PAN ) of the employees and amount paid as leave encashment; ii. 78 salary pay-slips covering approximately 68 percent of the total payments; and iii. Ledger extract containing the payment of leave encashment . 6. Disallowance under section 43B of the Act towards bonus payment 6.1. The Honouralbe DRP and Learned AO have erred in law and on facts in disallowing an amount of ₹ 20,01,73,768 under section 43B of the Act, holding that bonus was not paid to the employees. 6.2.The Honouralbe DRP and the Learned AO have erred in law and on facts in disallowing an arbitrary amount equal to 33 percent of the deduction for bouns claimed under section 43B of the Act. 6.3 The Honourable DRP and the Learned AO have erred on facts in stating that the Appellant could not produce adequate and substantial evidence to justify that the payment of bouns was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-deduction of tax at source pertaining to payables to related parties 8.1. The Honouralbe DRP and Learned AO have erred in law and on facts in disallowing an amount of ₹ 22,55,10,000 under section 40(a)(i)/(ia) of the Act. 8.2.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 payables to related parties ,as appearing in Note3.5 of the financial statements of the Appellant, under section 40(a)(i)/(ia) of the Act, without providing any rationale/ reason. 8.3 The Honourable DRP and the Learned AO have erred on facts in treating the entire amounts to be provisions created for expenses at the end of the year and further, alleging that the Appellant has failed to withhold taxes on such provisions, without appreciating the facts provided in the submissions, the such payables to related parties ate not year-end provisions but actual liabilities which were incurred during the relevant previous year and in the past financial years, on which taxes have been deducted wherever applicable, and duly paid as per the provisions of Chapter XVII B of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,05,66,21,184/- Reimbursement of expenses 2,29,06,37,234/- Recovery of expenses 9,54,22,397/- Capital WIP rechargers 27,53,21,203/- 2.2. Assessee used TNMM as most appropriate method to determined the arm s length price of international transaction in IT services (SWD) and ITES segment provided to the associated enterprises., With OP/OC as the PLI. Ld.TPO observed that in TP study assessee selected following 8 comparables for SWD segment and 5 comparables in ITES segment: Comparables selected by assessee for SWD segment: S.no. Name of company Margin 1. Akshay software Technologies Ltd 5.15% 2. Evoke Technologies Pvt.Ltd 7.68% 3. Goldstone Technologies Ltd 9.58% 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mindtree Ltd 20.43 % 6. RS Software (India) Ltd 22.25 % 7. SQS India BSF I Ltd 22.37 % 8. Thirdware solution Ltd 44 .68 % Average margin 29.40% Ld.TPO, thus computed proposed adjustment being shortfall in arms length price for SWD segment at ₹ 87,50,25,800/- 2.5. Comparables selected by Ld.TPO for ITES segment: S.no. Name of company Margin 1. Infosys BPO Ltd 27.43% 2. Microgenetic systems Ltd 18.06% 3. Microland Ltd 20.07% 4. BNR Udyog Ltd (Seg.) 25.08% 5. Crossdomain solutions Pvt.Ltd. 21.07% A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, evidence of leave encashment payment being made, copies of return of income of employees, against which claim was made by assessee, which were not admitted by DRP. DRP however admitted additional evidence regarding bonus payment and directed Ld.AO to allow the claim to the extent that, such claim has been satisfactorily proved with reference to evidences filed. 3.2. DRP directed assessee to file relevant details before Ld.AO regarding disallowance of 10% 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% on ad hoc basis under section 40 (a) (i)/(ia) in respect of payables to related parties. On receipt of DRP directions, Ld.AO passed the impugned assessment order by making addition of ₹ 5,42,96,89, 560/- to the returned income of assessee. Aggrieved by additions made by Ld.AO, assessee is in appeal before us now. 4. Ld.AR submitted that Ground No. 1-2.3 are general in nature and therefore do not require adjudication. 4.1. Ground No.2.4-2.5 has been raised by assessee challenging exclusion/inclusion of certain comparables under SWD and ITES segme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This work is done as an discussion and guidance of the offshore AEs who approve or sign off the final model. ➢ Ensuring quality testing of software solutions based on the predefined quality control procedures. ➢ Supporting is in initial/unit testing of the modules/components developed to ensure that the activity relative meet the specifications/requirements as agreed with the. The final acceptance testing of the software product vests with the AEs. 4.2.2. ITES segment Services rendered by assessee under this segment are divided into various divisions being operations, technology, finance, compliance division, human capital management, internal audit, legal and compliance, securities, investment management division, service finance procurement. It has been submitted that all these divisions are involved in providing backend support services to support the business process of assessee s group concerns. It has been submitted in TP study that assessee has entered into self-service agreement with the group companies on 09/03/06 provision of various back and support services. Details of various services rendered by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owned by assessee. Ld.AR submitted that, this company is a huge brand value and expenses of brand building is high. Referring to page 1860 of paper book volume 3 Ld.AR submitted that this company owns prod and are also involved in research and development activities. Ld. CIT DR placed reliance upon orders of authorities below. We have perused submissions advanced by both sides in light of records placed before us. From the annual report of this company placed in the paper book relied upon by Ld.AR, it is observed that this company is not comparable to the profile of assessee. Further it is an accepted position that this company is a giant risk-taking company and is engaged in development and sale of software products and own intangible assets. Under such circumstances we deem it fit and proper to exclude this comparable from the finalist. Accordingly Ld. AO/TPO is directed to exclude this company. 5.1.2. Larsen and Toubro Infotech Ltd This comparable was upheld by authorities below and has been objected by assessee for its inclusion. Ld.AR submitted that this company is functionally not comparable with that of assessee and is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We also find that in the case of remaining three Tribunal orders i.e. Microsoft Research Lab India Pvt. Ltd.'s case (supra), WM Global Technology Services (India) (P.) Ltd. (supra) and in the case of Tecnotree Convergence Pvt. Ltd. (supra), the matter was remanded to the TPO for fresh decision. Hence, we feel it proper that in the present case also, this issue should go back to the file of TPO for fresh decision after providing adequate opportunity of being heard to the assessee and while deciding the issue afresh, all the available Tribunal orders on this issue should be considered by the TPO in proper perspective. It is observed that the decision in case of CGI Information Systems Management Consultants Pvt.Ltd VS. DCIT(supra) was in respect of assessment year 2013-14. On perusal of annual report of this comparable placed at page 2012 of paper book volume 5, it is observed that during the year this company has not derived any revenue from sale of products. The only revenue earned by this comparable during the relevant year under consideration is from sale of services. It is observed at page 2022 that this company incurred overseas staff costs at ₹ 15,46,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only such functions which are required by associated enterprise under its supervision and guidance. Accordingly, we direct Ld. AO/TPO to include this comparable from the finalist. 5.1.4. Thirdware Solutions Ltd This comparable has been considered by Ld.TPO which has been objected by assessee. Ld.AR submits that this company is functionally different and earned revenues from export of services, subscription and training and sale of licensing. Ld.AR submitted that there are no segmental details in respect of this comparable. Ld.CIT DR however placed reliance upon decision of Hon ble Delhi High Court in case of Steria India Ltd vs DCIT reported in (2018) 92 Taxmann.com 120. She submitted that Hon able Delhi High Court held this comparable to be a good company. We have perused submissions advanced by both sides in light of records placed before. From the annual report of this company placed at page 2334-2444, it is observed that at page 2413, segment reporting of this company is set to be comprised of software development, implementation and support services. Further it has been submitted therein that primary segment reporting is based o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-12 has been excluded by DRP. On the contrary, Ld. CIT DR placed reliance upon authorities below. We have perused submissions advanced by both sides in light of records placed before us. It is observed from the annual report of this company placed at page 905-1043 of paper book volume 3 that this company has earned revenue basically from outsourcing solutions to several clients and its service offerings span across multiple industries segment like financial services and insurance, manufacturing enterprises, energy utilities, communication and services retail, consumer packaged goods, logistics and life science is. Further, it is observed that this company has incurred huge selling and marketing cost which has been on an increasing trend year after year. Further, it is observed that this company has parent significantly in building and retraining its brand value. Such activities are not comparable with the back-end support services rendered by assessee to its AE s only. Accordingly we direct exclusion of this comparable from the final list. 5.2.2 Microland Ltd It has been submitted that this company was included by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d are dismissed, with the liberty to contest in an appropriate case.Accordingly ground 2.4 raised by assessee stands allowed partly as indicated hereinabove. 6. Ground No. 2.5. This ground has been raised by assessee against rejecting inclusion of certain comparables under SWD segment by authorities below. For inclusion of comparables under SWD Evoke technologies Ltd. CAT Technologies Ltd, I2T2 India Ltd. Exilant Technologies Pvt.Ltd. 6.1. Evoke Technologies 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 financial results incorporated branch revenue and profit, which was based on unaudited financial statements of branch outside India. It was also observed by DRP that export revenue constituted only 20.34% which did not fulfill filter applied by Ld.TPO. Ld.AR placed reliance upon annual reports of this company placed at page 2491 of paper book volume 6 wherein at page 2511 geographic income has been tabulated for year under consideration and income from software services and products by this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual report of this company placed at page 2991 of paper book volume 6, wherein for year under consideration, revenue is generated under 2 segments being, consultancy fee receipts amounting to ₹ 16,30,728/-and software development receipts amounting to ₹ 3,87,43,019/-. He thus submitted that the observations by DRP is contrary to the annual report of this company. 6.3.2. Ld. CIT DR placed reliance upon decision of ITAT Chennai Benches in case of GE Converteam EDC Pvt.Ltd Vs ACIT reported in (2017) 79 Taxmann.com 498. She also submitted that this comparable is functionally not similar with that of assessee. 6.3.3. We have perused submissions advanced by both sides in light of records placed before us. It is observed that the decision relied upon by Ld.CIT DR pertains to assessment year 2009-10. It is further observed that the Ld.TPO has considered this comparable to be functionally similar with that of assessee which has been categorically recorded at page 33 of order passed by him. Thus we reject argument advanced by Ld.CIT DR in respect of functional dissimilarity with that of assessee. However we direct Ld.AO/TPO to verify the said comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there is merit in the contentions of the assessee that the above said company might not have had related party transactions during the year under consideration. Accordingly we do not agree with the reasoning given by Ld. DRP for excluding this company as a comparable. Accordingly we direct the Ld. AO/U.S. include this company. It is observed that DRP in present case objected for inclusion of this comparable because this company is operating in ITES industry. Annual report of this comparable has been placed at page 593 of paper book volume 2. It is observed functionally it is providing export of software and services. Annual report placed in paper book does not contain functions performed by this comparable in order to ascertain whether this company is rendering SWD services or not. We therefore, set aside this issue to Ld.AO/TPO for verification. Ld.AO/TPO shall call for requisite information from this company, a copy of which shall be provided to assessee also. Comparability of this company with assessee shall then be considered by giving proper opportunity to assessee. Accordingly, this comparable is set aside to Ld.AO/TPO. In respect of other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer pricing purposes. Guidlines on adjustments to be provided is found in paragraphs 3.47-3.54 and in the Annex to Chapter III. The guidelines must be followed for computing arm's length principle, and for comparing comparable uncontrolled transactions. Reasonably accurate adjustments should be made to eliminate effect of any such differences 7.3. Paragraphs 13 to 16 of OECD guidelines, emphasizes need for working capital adjustment in terms of receivables and payables as under: 13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the Price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mption that the difference should be reflected in profits. Methodology to compute working capital adjustment is given in Paragraphs 13 to 16 of the aforesaid OECD Guidelines(supra). These guideline also indicate factors that needs to considered like; 7.5. The point in time at which the Receivables, Inventory and Payables should be compared between tested party and comparables, and whether it should be the figures of receivables, inventory payable at the yearend or beginning of the year or average of these figures that should be considered;, 7.6. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with Assessee and Department should be the starting point and depending on the facts and circumstances of a case, further details can be called for. As far as Assessee is concerned, the facts and figures with regard to its business must be furnished. In so far as applying inventory, receivables and payables for computing working capital adjustment alledged by DRP/TPO in case of certain comparables, ITAT Delhi Bench in case of ITO v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly this ground raised by assessee stands allowed. 8. Ground No. 4 raised by assessee is in respect of disallowance made by Ld.AO under section 14 A of the Act. 8.1. At the outset Ld.AR submitted that there is no exempt income during the year under consideration and therefore no disallowance could be computed under section 14 A by applying rule 8D. In support of his contentions he placed reliance on a recent ruling by Hon ble Madras High Court in case of CIT vs Chittinad Logistics Ltd reported in (2018) 18 Taxmann.com 221. It is also been submitted that Hon ble Supreme Court has dismissed SLP filed by revenue in this case which has been reported in (2018) 95 Taxmann.com 250. 8.2. Ld.CIT DR placed reliance upon orders passed by authorities below. 8.3. We have perused submissions advanced by both sides in light of records placed before us. Admittedly, there is no exempt income earned by assessee during the year, as has been noted by Ld.AO in impugned order. Under such circumstances, ratio of Hon ble Madras High Court which has been approved by Hon able Supreme Court in case of Chittinad Logistics Ltd (supra) is squarely applicable. Respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 disallowance of provision for expenses under section 40 (a) (i)/(ia) on account of non-deduction of tax at source pertaining to other payables and pertaining to related parties. 10.1. It has been submitted that Ld.AO/DRP disallowed arbitrarily amount equal to 10% of the payables to related parties and other payables for non-deduction of TDS. It has been submitted that there is no rational for disallowing 10% of the payables. Ld.AR submitted that there is nothing pointed out by authorities below to establish a defect and that Ld.AO has also not rejected the books of accounts of assessee for an ad hoc disallowance. 10.2. Assessee submitted that in respect of related party payables Ld.AO has disallowed on the closing balance. Ld.AR submitted that DRP has directed Ld.AO to factually verify the claim based upon the evidences to be furnished by assessee within 10 days and such direction has not been complied with by Ld.AO. He submitted that Ld.AO while passing impugned assessment order disallowed the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X
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