TMI Blog2019 (5) TMI 1745X X X X Extracts X X X X X X X X Extracts X X X X ..... A of the Act, respectfully following the decision of Hon ble Delhi High Court in the case of Cheminvest Ltd. [ 2015 (9) TMI 238 - DELHI HIGH COURT] . The disallowance made by the lower authorities is accordingly deleted. The ground no. 16.2 of the appeal is accordingly allowed. Since the disallowance under section 14A has already been deleted Interest expenses under section 36(1)(iii) - assessee failed to justify that the advance was for any commercial expediency or any business benefit has been accrued to the assessee - HELD THAT:- No addition on account imputed interest attributable to allegedly interest free advances is called for and that a nexus is required to exist and be proved between the borrowing and lending of funds. Disallowance on account of contribution to labour welfare fund - HELD THAT:- Parties have agreed that identical question of disallowance was involved in immediately preceding assessment year 2012-13, which has been restored to the file of the learned Assessing Officer for deciding a fresh in accordance with law. Thus, respectfully following the finding of the Tribunal in [ 2017 (11) TMI 1725 - ITAT DELHI] while deciding the ground No. 14 and 15 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not recorded any reasons nor he had any material whatsoever on the basis of which he could even reach a prima-facie opinion, that it was necessary or expedient to refer the matter to the learned Deputy Commissioner of Income Tax, Transfer Pricing Officer - I( 1)(1), New Delhi (hereinafter referred to as Ld. TPO ) for computation of arm s length price ( ALP ) 3. That on the fact of the case and in law, the Ld. AO/ Ld. TPO / Hon ble Dispute Resolution Panel ( Hon ble DRP ) has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ( the Rules ), and conducting a fresh comparability analysis for the determination of the ALP of the Appellant s international transactions pertaining to provision of contract software development ( CSD ) services and technical support services ( TSS ) by the Appellant to its associated enterprises ( AEs ) and holding that the said international transactions are not at arm s length 4. That on the facts and circumstances of the case and in law, the order passed by Ld. AO in pursuance to the directions of the Hon ble DRP under section 143(3) read wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, Infomile Technologies Ltd, Silverline Technologies Ltd. and Lucid Technologies Limited as comparable, which is in contravention to the provisions Section 144C(8) of the Act. 6. That on the facts of the case and in law, the Ld. TPO / Hon ble DRP has erred in rejecting the Appellant s claim to use multiple year data for computing the arm's length price and, instead, has adhered to the use of single year updated data to conclude the ALP of the international transaction which was not available to the Appellant at the time of undertaking transfer pricing study required to be maintained under Section 92D of the Act. 7. That on fact of the case and in law, the Ld. TPO/ Hon ble DRP has erred in application of inappropriate filters based on turnover, different financial year end, service income, export sales and employee cost for identifying companies comparable to the Appellant. 8. That on the facts of the case and in law, the Ld. TPO/ Hon ble DRP has erred in selection of functionally non-comparable companies and rejection of comparable companies, as per provisions of Rule 10B(2), for the purpose of determination of ALP of the international transactions pertaining to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to disallow an amount of ₹ 6,17,20,463/- under Section 37(1) of the Act on account of prior period expenditure. 15.1 That on the facts and circumstances of the case and in law the Ld. AO has erred in summarily rejecting the appellant s contentions and not considering the binding judicial precedents which squarely applies to the facts of the appellant s case. 16. That on the facts and circumstances of the case and in law, the Ld. AO is not justified in making a disallowance of ₹ 28,61,300/- by applying Rule 8D read with Section 14A of the Act, having regard to the accounts of the appellant, without recording his dissatisfaction with respect to correctness of claim made by the appellant that no expenditure has been incurred in relation to earning exempt income during the subject assessment year. 16.1 That on the facts and circumstances of the case and in law, the Ld. AO has grossly erred on facts in concluding that the said disallowance be made under section 14A of the Act where own funds have been used by the appellant for making strategic investments in group companies. That the Ld. AO has failed to appreciate that the investments were driven by business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturn of income for the year under consideration on 29/11/2013, declaring total income of ₹ 178,69,64,430/-, which was further revised to ₹ 111,54,93,650/-, in the revised return of income filed on 12/11/2014. The case was selected for scrutiny and statutory notices were issued and complied with. The Assessing Officer noted the International Transactions carried out by the assessee with Associated Enterprises and accordingly, referred the matter to the learned Transfer Pricing Officer (TPO) for determination of arm s length price of those international transactions. The learned TPO in his order under section 92CA(3) of the Act proposed adjustment of ₹ 91,24,40,290/- to the value of the International Transaction. The Assessing Officer in the draft assessment order dated 30/12/2016 included that adjustment proposed by the learned TPO and other additions. Against the draft assessment order, the assessee filed objections before the learned DRP. The learned DRP after considering the objections of the assessee, issued certain directions on 26/09/2017, which resulted in modification of the transfer pricing adjustment to ₹ 65,65,05,130/-. The learned DRP also issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction pertaining to provision of contract software development ( CSD ) services. 8.2 The learned AO/ TPO and Hon ble DRP, in particular, erred in rejecting Cat Technologies Limited, Maveric Systems Limited, Infomile Technologies Limited and Silverline Technologies Limited as comparables selected by the Appellant on account of functional dissimilarity for the purpose of determination of arm s length price ( ALP ) of international transaction pertaining to provision of CSD services, KIA. 8.3 The learned AO/ TPO and Hon ble DRP, in particular, erred in selecting Allcargo Logistics Limited, HSCC (India) Limited, Mitcon Consultancy Engineering Services Limited, Holtec Consulting Private Limited, Certification Engineers International Limited and Acropetal Technologies Limited (Segmental) as comparables without appreciating that these companies are not functionally comparable to the Appellant in relation to the international transaction pertaining to provision of technical support services ( TSS ). 8.4 The learned AO/ TPO and Hon ble DRP, in particular, erred in rejecting Microland Limited (Segmental) and Desein Private Limited as comparables selected by the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated to be development/coding, testing, maintenance of support for software development. The AEs provided specifications relating to the assignment to be undertaken by the assessee. The assessee in its transfer pricing study for contract software development (CSD) services provided to the Associated Enterprises (AEs) determine the arm s length price applying Transactional Net Margin Method (TNMM). The Operating Profit to Total Cost (OP/TC) was taken as profit level indicator (PLI) in the TNMM analysis. The PLI of the assessee company was arrived at 7.98 percent, whereas the average PLI of the comparables was arrived at 8.20%. As the average margin of the comparable companies was within the plus minus (+5%) range, the assessee found the price of International transaction declared by it at arm s length price. The assessee after applying various filters over the database like exclusion of companies having software development service income less than rupees one crore, exclusion of companies having revenue from service less than 75% of the total operating revenue, exclusion of the companies having insufficient financial data etc, selected 10 companies as comparable. The Ld. TPO, ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee and engaged in providing a wide array of end-to-end services. He submitted that the company is engaged in research and development activities and owns significant intangible assets and undertakes significant brand building activities. He also submitted that the turnover of the company is 62 times the turnover of the assessee from provision of CSD services. The Ld. counsel submitted that the company earns from dealing in software products and earns income from software licensing as well. The learned counsel also submitted that the company has been rejected in assessee s own case by the Tribunal in assessment year 2011-12 and 2012-13 and the decision of the Tribunal in assessment year 2011-12 has been upheld by the Hon ble Delhi High Court. He submitted that the DRP in its direction for assessment year 2014-15 has rejected the company is comparable. The learned counsel also relied on number of decisions including decision of the Hon ble Delhi High Court in the case of Agnity India Technologies Private Limited.( ITA 1204/2011). (ii) The Ld. DR on the other hand relied on the order of the lower authorities and submitted that the company is functionally similar to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year 2014-15. (ii) The learned DR, on the other hand, relied on the finding of the lower authorities and submitted that the assessee has not demonstrated as how the ownership of intangibles will impact the profit margin. (iii) We have heard the rival submissions of the parties. The learned DRP retained the comparable on the ground that the assessee failed to demonstrate or adduce evidence to show that how objections raised regarding the research and development, IP/intangibles ownership has impacted the margins and how it can automatically become the basis for adjustment. The learned DRP also relied on the direction of the DRP for assessment year 2012-13, where the company has been accepted as a valid comparable. But, we find that the lower authorities have not examined properly the functional dissimilarity of the company. The learned DR could not controvert what that the company is engaged in sale of products along with the services. We find that on page 44 of the learned TPO s order, he himself has mentioned that the company was engaged in sales of the the products namely AccuRUSI and Unitrax . Further on perusal of the profit and loss account, we find that o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eport compendium that the company offers services which includes IT strategy consulting, data warehousing, business intelligence, technical support, infrastructure management services etc. The relevant part of the director s report is reproduced as under: We have developed a comprehensive range of services allowing us to offer end-to-end IT Services to our clients. With delivery centers in India and overseas, we offer IT strategy consulting, application development and maintenance, data warehousing and business intelligence, package implementation, product architecture, design and engineering, embedded software, technical support, testing infrastructure management services etc. to our customers. We believe that our comprehensive portfolio of service offerings helps our customers achieve their key business objectives. (iii) Further, on perusal of the page 442 of the Annual Report compendium, we find that the company has used expertise in research and development to provide technology consulting services to its customers. (iv) On page, 480 of the Annual Report compendium under significant accounting policies and notes to account for the year ended 31/03/2013, the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e development services and therefore cannot be compared to a software development service provider. The learned counsel submitted that the company incurs significant R D expenditure which resulted in global patents and the company owns significant intangibles which have either been developed or have been acquired from 3rd parties as part of inorganic growth strategy. The learned counsel also submitted that the company has been rejected by the Tribunal in assessee s own case for assessment year 2011- 12 and assessment year 2012-13. The decision of the Tribunal of rejecting the company has been upheld by the Hon ble Delhi High Court in assessment year 2011-12 . In view of the above, the learned counsel submitted that the company might be excluded from the final set of the comparables. (ii) The learned DR, on the other hand, relied on the order of the lower authorities and submitted that under that TNMM a small variations in vertical activity might be accepted. (iii) We have heard the rival submission and perused the relevant material on record. The learned TPO observed that the company delivers services across all stage of the product life-cycle, which enables them to work wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) We have heard the rival submission and perused the relevant material on record. The learned DRP directed the learned TPO to verify whether company fails any of the filters approved by the learned DRP, however, the functional dissimilarity was not examined properly by the learned DRP. On perusal of the pages 648, 651, 663, 690 and 720 of the compendium of the Annual Reports, we find that the company is engaged in providing logistic and transport solutions as against the assessee, who has provided technical support services. The company being functionally dissimilar with the TSS segment of the assessee, we direct the Ld. AO/TPO to exclude the company from the final set of the comparables for TSS segment. 2. HSCC (India) Ltd. (i) The learned counsel submitted that the company fails to qualify the filter of a ratio of service income to total income being more than 75%, because in the case of the company the said ratio is only 57.92%. Further the learned counsel submitted that learned DRP in its direction for assessment year 2014-15 has excluded the company from final set of the comparables by observing that it is a government undertaking and FAR profile of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as available and the segment in relation to consultancy services and training consist of revenue from sale of printed course material which cannot be compared to the TSS segment of the assessee. Further, the learned counsel submitted that the company has received grants from government of India to support such operation and need to be excluded on the ground of government assisted company. The learned counsel submitted that the learned DRP for its direction for assessment year 2014-15 has excluded the company from the final set of the comparables by observing that it has received government grant and FAR profile of the company being different from the FAR profile of the TSS segment of the assessee. (ii) The learned DR, on the other hand, relied on the order of the lower authorities. (iii) We have heard the rival submission and perused the relevant records including the Annual Report of the company. We find from page 820 of the Annual Report compendium that the company has received capital grant from the Department of Science and Technology, Government of India for export facilities and Centre and for setting up Biotechnology Laboratory. The company has also received a grant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f TNMM. (iii) We have heard the submission of the both the parties on the issue of exclusion of the company. We find from page 873 of the compendium of Annual Reports, that the company is primarily engaged in the business of rendering engineering consultancy services to its clients located in India and abroad. Under the consultancy services, the recipient is advised in carrying out the actual project or task whereas under the technical support services, the assessee itself has executed the task on the project and thus the function of providing consultancy is different from the function of providing technical support services. Thus the company being functionally dissimilar to the assessee, it cannot be compared with the TSS segment of the assessee and accordingly, we direct the Ld. AO / TPO to exclude the company from the final set of the comparables. 5. Certification Engineering International Ltd. (i) The learned counsel submitted that the company is engaged in certification activities and third-party inspection job, which cannot be compared to the TSS segment of the assessee. The Ld. counsel also submitted that the company is a government company and providing servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be excluded. (ii) The Ld. DR, on the other hand, referred to the finding of the learned TPO who has found the engineering design segment of the company as comparable to the technical support segment of the assessee. He also supported the finding of the learned DRP that under the TNMM small variation in verticals are tolerated. (iii) We have heard the rival submission and perused the relevant material on record. The services rendered by the assessee under the technical support service segment include fault ticket generation support with regard to integration, installation, interoperability testing, on-site installation, update/upgrade etc, which cannot be compared functionally with the services of providing designs or product design and development. In our view, the engineering design segment of the company is functionally dissimilar to the technical support service segment of the assessee. Accordingly, we direct the Ld. AO/TPO to exclude the company from the final set of the comparables. 4.7 In view of our above directions regarding excluding of the comparables, the learned AO/TPO is directed to re-compute the average margin of the final set of the comparables and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has raised issue of disallowance of ₹ 28,61,300/- under Rule 8D of Income-tax Rules, 1962 read with section 14A of the Act. 6.1 Before us, the learned counsel of the assessee submitted that no exempt income has been earned by the assessee during the relevant assessment year and thus in view of the decision of the Hon ble Delhi High Court in the case of Cheminvest Limited reported in 378 ITR 33W (Delhi), no disallowance can be made in the hands of the assessee. The Ld. DR also could not controvert the fact that no exempt income has been earned by the assessee during the year under consideration. 6.3 We have heard the rival submission and perused the relevant record. The Hon ble Delhi High Court in the case of Cheminvest Ltd (supra) has held as under: In the context of the facts enumerated hereinbefore the court answers the question framed by holding that the expression does not form part of the total income in section 14A of the Act envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for any commercial expediency or any business benefit has been accrued to the assessee. Accordingly, he made disallowance of proportionate interest expenses of ₹ 44,67,442/-. We find that identical question of disallowance under section 36(1)(iii) was before the learned DRP in assessment year 2014-15. The Ld. DRP, after considering the finding of the Ld. AO in draft assessment order and submission of the assessee, deleted the addition observing as under: 2.6.3 From the draft assessment order it is observed that the AO has simply disallowed interest by imputing the argument that interest should have been charged on the funds/loan given to other parties without making any effort to bring on record sufficient facts so as to establish the nexus between borrowed funds and funds advanced to CARC In fact there is no finding on fact in the draft assessment order, and the addition proposed is simply ad hoc in nature. The submissions of the assessee that the entire funds raised have been deployed in the business of the appellant company and interest paid thereon is justifiable on the grounds of commercial expediency and used for the purpose of Business has not been controvert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the first instance, that it was allowable under section 36 1)(iii). and in the case of a firm, further that the amount does not exceed the limit fixed by section 40(b)(iv). Held, however, on the facts, in this case, that since the Appellant had borrowed the moneys from its partners as early as 1991. and the Appellate Tribunal had held that the loans were given by the partners for business purposes and the interest did not exceed 18 per cent per annum simple interest, the Appellant-firm was entitled to deduction of interest on the borrowings for the assessment years 1993-94 to 1997-98.' Similar view has been followed in the case of Commissioner of income Tax v. Motor Sales Limited [(2008) 304 ITR 123 (All)], Commissioner of Income-tax Vs Pudukottai Company Pvt. Ltd. [(1972) 84 ITR 788 (Mad)], Chetan Dass Laxman Dass Vs Income Tax Officer {(2002) 122 Taxman 263 (Delhi) (Mag)], Gujarat Narmada Valley Fertiliser Co. Ltd. Vs Deputy Commissioner of Income Tax [(2000) 108 Taxman 213 (Ahd)(Mag)], Commissioner of Income-Tax vs. Hotel Savera [(1999) 239 ITR 795 (Mad)], Shree Digvijay Cement Co. Ltd. Vs Commissioner of Income-tax, Gujarat- V [(1982) 138 ITR 45 (Guj)], D H Secher ..... X X X X Extracts X X X X X X X X Extracts X X X X
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