TMI Blog2020 (2) TMI 1222X X X X Extracts X X X X X X X X Extracts X X X X ..... ntiated the choice in its transfer pricing study report, in my considered view of the matter it is for the ld. TPO to record and substantiate the reasons as to why the assessee s MAM is incorrect and why some other TP method needs to be the MAM; that said in the instant case, see no determinative substance in any of the ld. TPO s arguments for rejection of assessee s internal CPM and adoption of external TNMM. Based on the above reasoning, I hold that CPM as adopted by the assessee, be adopted as the MAM for the export of software services by the assessee. Accepting segmented accounts for AE for establishing arm s length price - We note the assessee explained before ld TPO in thread bare detail of functional analysis of the transactions and the Ld. TPO has failed to give due cognizance to the essence of the respective transaction. All the transactions are independent in terms of activities, purpose and legally through binding agreement. The cost of rendering/ receipt of services are also captured separately in the accounting system. In support of the same, the assessee has provided the segmental data of I2A and I2B for transactions with the assessee, the margin of which was be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned eight cross appeals filed by the Revenue and as well as Assessee, pertaining to assessment years2010-11 to 2013-14, are directed against the separate orders passed by the Commissioner of Income Tax (Appeal), which in turn arise out of separate assessment orders passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (in short the Act ). 2.Since, the issues involved in all the cross appeals are common and identical; therefore, these appeals have been heard together and are being disposed of by this consolidated order. For the sake of convenience, the grounds as well as the facts narrated in, revenue s appeal in ITA No. 2075/Kol/2017 for A.Y. 2010-11 and revenue s appeal in ITA No. 220/Kol/2018 for A.Y. 2011-12, have been taken into consideration for deciding the above appeals en masse. 3. The Revenue s appeal in ITA No. 2075/Kol/2017, for A.Y. 2010-11 is barred by limitation by 4 days. The Revenue filed a petition for condonation of delay requesting the Bench to condone the delay. We have heard both the parties on this preliminaryissue and having regard to the reasons given in the petition for condonation of delay, we condone the delay and admit the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner would be to file an appeal along with an application for condonation of delay. 6. Upon being so advised, the petitioner now seeks leave of this Hon ble Tribunal to prefer an appeal and claim the cess as an allowable expense. In this regard reference is drawn to the decision of the Hon ble Supreme Court in the case of National Thermal Power Co. Limited (supra) wherein the Hon ble Court while deliberating on the powers of the Appellate Tribunal to admit and adjudicate fresh claims held that: The purpose of the assessment proceedings before the taxing authoritiesis to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances of the case and in law the ld. CIT(A) was justified in accepting the contention of the assessee, that foreign AEs can be considered as the tested party by establishing arm s length price? This ground covers ground no. 1 in revenue s appeal for A.Y. 2010-11 to 2013-14. 2.Whether on the facts and in the circumstances of the case and in law the ld. CIT(A) was justified in accepting the Cost Plus Method (CPM) as the most appropriate method for establishing arm s length price in the services rendered by BAT, Pyxis and SNPL? This ground covers ground no.2 raised by the revenue for AY 2010-11. 3.Whether on the facts and in the circumstances of the case and in law the ld. CIT(A) was justified in accepting the segmented accounts for AE for establishing arm s length price. This ground covers ground no. 3 raised by the revenue in A.Y. 2010-11. Grounds relating to Corporate issue 4.Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in treating the software expenses of ₹ 39,58,659/- [55,16,940 15,58,281] as revenue expenditure ignoring that the said expenses are of enduring measure. This ground covers gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enchmarking analysis in its Transfer Pricing Study ('TP Study') wherein all international transactions have been analysed separately and the margin earned by 'least complex entity'has been benchmarked from arm's length perspective.In addition, the assessee had also provided IT services to its AEs, British American Tobacco Shared Services, Pyxis Solutions LLC and Surya Nepal Private Limited. The benchmarking approach in the TP Study for all the above transactions entails carrying out a detailed functional, asset and risk analysis ('FAR') and economic analysis for each transaction.Based on the FAR and the facts and circumstances of the respective transaction, the assessee had benchmarked the profitability of the respective transaction. Thus, the economic analysis including the selection of tested party is based on the FAR profile of the transacting entities.The determination of margin for the tested party for the purpose of benchmarking analysis, is based on data derived from audited financial statements of the assessee and respective AE. ITC Limited is a part of the British American Tobacco (BAT) group and has a diversified presence in product segments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revenue submitted before us that ld. CIT(A) was not justified in accepting the contention of the assessee, that foreign AEs can be considered as the tested party by establishing arm s length price. In case of foreign AEs, accounting year ending is (January to December) 31st December every year whereas in case of Indian entity the accounting year ending is (April to March) 31st March every year. Therefore, it is not possible to compare the financial statements of foreign AEs, with Indian entity. If the foreign AEs are selected as tested party then it becomes difficult to find comparable companies for TP analysis. In case of foreign AEs, the revenue recognition method, expenses recognition method, and inventory valuation and recognition method are different therefore comparison of financial data is not possible, hence the foreign AEs should not be selected as a tested party. 10.On the other hand, ld Counsel for the assessee defended the order passed by the ld CIT(A). 11. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities which have held that the least complex entity should be the tested party ( including the Kolkata jurisdiction rulings in case of Development Consultants Limited (ITA No. 1591/KOL/2010) and Landis + Gyr Limited (ITA No. 37 and 1623/Kol/2012 )).While the TPO has rejected the adoption of foreign AEs as the 'tested party' in the instant case, he has not brought any specific findings for coming to this conclusion. The TPO has quoted few case laws to reject the foreign AEs of the Assessee as the tested party. I have discussed on the case relied upon by the Assessee a bit later in this order. I have gone through the literatures produced by the Assessee on selection of the 'tested party'. After going through the documents, there seems to be no doubt that the entity with the least complex functions should be adopted as the tested party if reliable data for transfer pricing comparison is available. In the instant case,it is clear that the Assessee is performing the more complex functions when compared with the AEs (the functional profile has been confirmed by the Hon'ble High Court of Calcutta and the Jurisdictional ITATs- as mentioned above) and also t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the concept of overseas tested parties and foreign comparable companies is well recognized and acknowledged by Indian Revenue as could be seen from India's commentary in United Nations Practice Manual on Transfer Pricing for Developing Countries. and further has taken cognizance of the Hon'ble Delhi Tribunal ruling in the case of Ranbaxy Laboratories (supra) wherein the concept of overseas tested parties and foreign companies for determination of ALP has been accepted. Consequently, the Hon'ble Tribunal held that the Ld. TPO s action of selecting Assessee as the tested party would result in an abnormal outcome in the TP adjustment and concluded that 5.2.12 ...with regard to correct application of CPM or TNMM, the Associated Enterprises of the Assessee should be selected as the tested party to the transaction, as being the least complex entity. Subsequently an analysis of gross margin by applying either CPM or TNMM retained by AEs should be undertaken for benchmarking the transactions... . Therefore this ruling overrules the findings made in the ruling of onward Technologies (supra) which was relied upon by the TPO in the assessee s case and incidentally was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nerally, the number of personnel required with the desired skill are specified by the client. These personnel were deputed work according to the instructions of the client. These are generally time based contracts and the billing would depend upon the exact terms and conditions of the contract. Generally billing is based on the concept of time and material. Off site: Under this category. the company enters into a contract with the client for the development of certain specific software. The software is developed at the software development facility of the company and then integrated into the system of the client. The business profile of 13L can be represented through the following diagram: 4.31 Contractual Relationship between 13L and its subsidiaries The business between 13L and its subsidiaries is regulated by the contracts between 13L and the subsidiaries. Since the terms of the contract between each of the subsidiaries are similar, the following paragraphs outline the significant contractual terms. Resourcing : Under the contract 13L and its subsidiaries would exchange information on IT qualified professionals database with each other. upon a request b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on acceptance of the 13L resources by such Customers, processing the necessary documents and taking steps for securing visas and work permits. - Arranging for accommodation and other facilities required by the resources deployed by 13L at the 13L Customer site and generally providing such assistance as may be required to enable such resources to settle down at site - Liaising between the resource teams deployed by 13L (in India or at Customer locations abroad) and the Customer to ensure effective communication between the teams. - Monitoring the progress in the execution of each Scope of Work and liaising between the Customer and 13L to facilitate execution of the same. - Obtaining feedback on client satisfaction for each Scope of Work and on the performance of Resources deployed by 13L. - Performing other administrative functions including lodging and collection of bills on the respective due dates, filing time sheets and obtaining approval of the Customers for the same etc. - Carrying out specific Customer assessment(s) including potential risk analysis, credit analysis etc. - 13L will provide 12A/12B with relevant information and documents necessary to enabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven offshore centric delivery models and availability of a dedicated offshore centre with secured and replicated IT environment which truly represents an extended enterprise of the customer organisation. The foreign customers who are having a long term road-map for off-shoring therefore are increasingly trying to tie up directly with the India based delivery organisations. In such cases. the contract is entered into between the customer and 13L but the functions and risks undertaken by both 13L and 12A/12B remain the same as they are when the customers enter into the contract with 12A/12B. The functions performed by 13L and 12A/12B under the above two business scenarios has been Summarised below. Thus, from the above table, it can be seen that the functions being carried out by 13L and its AEs (12A and 12B) under both the business models are the same. Under both the business models, the basic functions of the AEs, with regard to the administrative functions i.e. Account management, are the same. Similarly, 13L's functions under both the business scenarios, with regard to non-administrative services also remain the same. Intellectual Property : Each Party (13L, 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered management services to 12A and 12B on an exclusive basis. This transaction was based on the following functional aspects: A portion of 13L s managerial time was spent on the business interest of 12A and 12B. Hence it was justified to recover the associated costs from the actual benefit recipient. Certain top level marketing effort by 13L personnel also served the business interest of 12A and 12B, hence 13L was justified in receiving a remuneration for the time spent. The assessee would like to highlight the fact that the above services are not the main line of business operation of the assessee. The services are auxiliary in nature and as such the assessee recovered the estimate cost of the effective time spent by the managerial personnel on 12A and 12B's business interest along with a mark-up of 11% to recover the administrative charges .The assessee does not assume any risk and the services are rendered out of the assessee s own resources. 4.3.3 Inside Sales Services 13L has a dedicated team that provides call centre support services to 12A 12B. The support services provided by the sales centre within 13L involves placing calls to potential cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tangibles play a significant role in the functioning of a business and are accordingly more important. An understanding of the assets employed and owned by 13L provides an insight into the resources deployed by 13L and their contribution to the business processes/economic activities of 13L 4.1.1. Tangibles/ intangibles owned by 13L The following types of assets owned by 13L as on March 31, 2010 18 Type of Fixed Assets Gross Block (Rs) Leasehold Improvements 111,504,365 Plant Machinery 150,994,108 Computers etc. 218,799,604 Capitalised Software 300,851,251 Furniture and fixtures 62,702,716 Total 844,852,044 It may be also noted from the contract existing between 13L and 12A/12B, rights in Background Intellectual Property remains with 13L and any intellectual property created in course of development work on behalf of clients (Foreground Intellectual Property) is vested with the clients ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) of the Act, stating that the assessee is more complex entity and foreign AEs are least complex entities. The relevant discussion in the TPO`s order is reproduced below for ready reference: 8. The subsidiaries act primarilyas marketing arm of the assessee and perform the administrative services. It is the which is entrusted with the task of performing non-administrative, core essential services. It was however noted that even the top management marketing services were essentially sub-contracted back by 12A/2B to the ssessee for which management fees were paid to the assessee. Furthermore inside sale services to 12A/12B customers were also being rendered by the call center owned and operated by the assessee for which separate fees were paid. Meaning thereby the allegedly main task of marketing which was entrusted to the subsidiaries were being performed by the assessee only. From client interaction, identification, to sale coordination, placing cold calls and involvement of assessee's top management team were being performed by the asessee. These raised serious concerns on the nature of services being actually by the AEs. Accordingly relevant evidences/correspondences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalysis this function being performed by the asessee has been conveniently omitted and it has been stated that all marketing activities are performed by 12A 12B. Similarly for mapping the clients, liasioning with customers, client coordination etc. it has been mentioned that only the AEs are performing these functions Whereas inside sale services are being provided by the assessee's call centre. In the circumstances I find that the functional analysis undertaken by the assessee was factually incorrect and contrary to the facts on record. 9.2 Even in the risk analysis it is evidently clear that the assessee carries very high risk whereas the AEs are with minimum risk. In terms of the MSA between and AEs the provider of actual services shall bear full responsibility for the delivery of all Non-Administrative Services provided to a customer and shall be fully liable to the other entity for the same. Any claim for any deficiency in non-Administrative services would have to be borne by the assessee. By assessee's own admission the of a customer raising any claim for any deficiency in administrative services by the 12A/12B is very remote. In the circumstances it is surprisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing due cognizance to the FAR profile of the above transactions of the assessee with its AEs and erroneously rejected the analysis undertaken by the assessee. The Ld. TPO rejected the application of Cost Plus Method (CPM) wherein, margin earned by the assessee from transactions with third parties were compared internally with the margin earned from BAT and Pyxis. The Ld. TPO rejected the application of internal CPM based on the following: i) The CPM method presents some practical difficulties in identifying the costs incurred for the provision of services like whether an indirect costs is towards rendering services or it is an enterprise level expense. ii) There is no discernible link between the level of costs incurred and market price in software as the services are usually compensated on a man hourly basis which may not vary much across the industry for same or similar type of service. So, CPM is not the appropriate method. iii) While applying CPM, the tax payer should have to consider all direct and indirect costs incurred in respect of the services rendered by it. But, it is apparent the assessee itself did not include all the direct and indirect costs while comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and third parties. In relation to transaction with SNPL, the assessee submitted before the ld CIT(A) that considering the facts and circumstances of the transaction, gross margin over manpower cost (GP/Manpower Cost) was considered as the most appropriate profit level indicator ('PLI') since, the only cost incurred by the assessee in rendering the said service is manpower cost. While determining the margin (GP/Manpower Cost) of the comparable, same data elements i.e. sales and manpower costs were considered for computing the PLI of the identified comparable companies. 18. During the appellate proceedings, the assessee submitted following written submissions, which is reproduced below: Submission dated 26 April 2017 Selection of the Most Appropriate Method (MAM) The Assessee had adopted Cost Plus Method ( CPM ) as the most appropriate method for benchmarking the international transactions with its foreign AEs, CPM evaluates the arm's length nature of a controlled transaction by reference to the gross profit mark- up that is realised in comparable uncontrolled transactions. CPM is appropriate to use as the MAM in situation wherein the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party vide its submission dated 20 January 2014, This calculation showed that margins earned by I3L on transactions with BAT, Pyxis and the foreign AEs are at arm's length since the related party margin were in line with unrelated parties (Refer Convenience Paperbook Pages 1270-1292 for details). The Ld. TPO has issued the TP adjustment order without taking cognizance of this calculation. 19. The ld CIT(A) after taking into account assessee`s submissions and findings of the ld TPO, held as follows: 5. The last major contention of the Assessee is on the selection of the most appropriate method (MAM) for the transfer pricing analysis. It is to be well noted that the Assessee-company has been, following the CPM method for export of software services to its AEs consistently over the years. The Ld. TPO has rejected the use of CPM as the MAM by mentioning that CPM presents difficulties in identifying and segregating the cost between direct and indirect cost, At this juncture, it would be worthwhile to evaluate the situation wherein CPM can be used as the MAM. CPM evaluates the arm's length nature of a controlled transaction by reference to the gross profit mark-up t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antiate the reasons as to why the assessee s MAM is incorrect and why some other TP method needs to be the MAM; that said in the instant case, I do not see any determinative substance in any of the ld. TPO s arguments for rejection of assessee s internal CPM and adoption of external TNMM. Based on the above reasoning, I hold that CPM as adopted by the assessee, be adopted as the MAM for the export of software services by the assessee. We have gone through the findings of ld CIT(A) and do not find any infirmity. That being so, we decline to interfere with the order of Id. C.I T.(A) in deleting the aforesaid additions. His order on this addition is, therefore, upheld and the grounds of appeal of the Revenue are dismissed. 20. Summarized ground No. 3 reads as follows 3.Whether on the facts and in the circumstances of the case and in law the ld. CIT(A) was justified in accepting the segmented accounts for AE for establishing arm s length price. This ground covers ground no. 3 raised by the revenue in A.Y. 2010-11. 21. The brief facts qua the issue are that during the TPO proceedings the ld TPO rejected the segmental data of ITC Infotech, (USA), Inc ( I2A) and ITC Info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counts produced are reliable and are captured separately in the accounting system with utmost precision. Upon carefully analysis, I find myself agreeable with the contentions of the assessee that the transfer pricing legislation nowhere mandates that segmental accounts for transfer pricing analysis should be audited, The segmental accounts prepared for a transfer pricing analysis may not necessarily be same as the segmental accounts prepared for any financial statements. In the absence of any mandate that the segmental for transfer pricing should be audited, I am inclined to accept the contention of the Assessee that till the time the reliability of the segmental account is demonstrated, these can be used for a transfer pricing analysis and need not necessarily be audited. If it is also to be mentioned that the judicial rulings placed in reliance by the assessee-company support its contentions. The Ld. TPO has not brought out any specific finding to indicate that the segmental data of the Assessee-company are not reliable, and therefore liable for rejection, The Assessee before me explained in length how the segmental accounts are captured and the reliability of the same. Al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible for the Assessing Officer to ascertain whether software were useful for day to day purpose or it gives enduring advantage to the assessee. This ground covers ground no. 3 raised by the revenue in A.Y. 2011-12, ground no. 3 raised by the revenue in A.Y. 2012-13 and ground no. 3 raised by the revenue in A.Y. 2013-14. 25. Brief facts qua the issue are that the assessee, M/s ITC Infotech India Ltd, during Financial year 2009-10, relevant to A.Y. 2010-11, has incurred the following software related expenses: Sl. No. Particulars Amount (in Rs.) Remarks 1 Purchase of System Software's enduring in nature - Capitalised Fixed Assets by the appellant company 4,00,29,717/- Capitalised by the Appellant Company under Capitalised Software of Schedule 4 of the Audited Annual Accounts - Annexure 3 Total amount Of Systems Software's capitallsed by the Appellant Company 4,00,29,717/- 2 Software related expenditure towards consumables, mainte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... desktop platinum edition 301,076 2 Vistech Information Systems Pvt Ltd Purchase of TOAD Software for Oracle Professional edition 336,805 3 Sonata Information Technology Ltd Purchase of OS Pro - TOD - PB - Toad for Oracle Professional edition 920,400 Total 1,558,281 The aforesaid software tools are useful for carrying out projects on a continuous basis. Considering the nature of the business of the assessee, these software items are to beutilized for executing contracts for clients over a long term. They are meant to be used for executing a number of customer contracts giving enduring benefit to the assessee. On this functional test, they fall in the category of capital assets and expenditure on the same, in my considered view, is to be treated as capital expenditure. Considering this, the same were, in my opinion, required to be capitalized. The disallowance is therefore, confirmed in respect of them. The Ld. AO shall however, allow depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han High Court in the case of Chambal Fertilizers and Chemicals Ltd. vs. JCIT (ITA No. 52/2018) which after taking into account CBDT circular held that Sec. 40(a)(ii) applies only to taxes and not to education cess. Relevant extract of the decision is reproduced for ease of reference:- 13. On the third issue in appeal no. 52/2018, in view of the circular of CBDT where word Cess is deleted, in our considered opinion, the tribunal has committed an error in not accepting the contention of the assessee. Apart from the Supreme Court decision referred that assessment year is independent and word Cess has been rightly interpreted by the Supreme Court that the Cess is not tax in that view of the matter, we are of the considered opinion that the view taken by the tribunal on issue no. 3 is required to be reversed and the said issue is answered in favour of the assessee. 30. On the other hand, ld DR submitted that education cess is part of income tax and therefore should not be allowed as expenditure. 31. We have heard both the parties and perused the material available on record. We note that issue raised by the assessee is no longer res integra.We note that Coordinate Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has raised an identical additional ground in both cases seeking to claim education cess on provision for Income-tax amount of ₹ 71,65,049/- and ₹ 77,76,699 (assessment year wise); respectively as allowable in computing total income other than MAT u/s. 115JB of the Act. Hon ble Apex Court s land mark decision National Thermal Power Corporation Ltd (NTPC) V/s. CIT (1998) 229 ITR 383 (SC) as considered by this tribunal s Special Bench order M/s. All Cargo Global Logistics Ltd V/s. DCIT (12) 137 1TD 26 (Mum.) settles the law that we an very well entertain such a legal question in order to determine the correct tax liability when all the relevant facts form part of records. We thus allow assessee s additional ground to be raised. 32. We accept the submissions of the assessee concurring with the decisions of Rajasthan High Court and binding favourable decisions of Jurisdictional Tribunal and thus we allow the claim of the education cess. The AO is directed to allow the claim of education cess in computing total income of the assessee company. These grounds raised by the assessees are allowed for A.Y. 2010-11 to 2013-14. 33. In the result, appeals filed by the R ..... X X X X Extracts X X X X X X X X Extracts X X X X
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