TMI Blog2020 (5) TMI 235X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of an entire undertaking as a going concern and assessing officer should have computed the capital gains under section 45 to 50 of Income tax Act. Ld.AO has also not identified the items that have been sold independently but has considered the lump sum valuation made by the buyer in the hands of assessee which is not in accordance with the provisions of the act. We therefore direct Ld.AO to compute the quantum of capital gains in accordance with law as a slum sale. Ld.AO is directed to decide the cost of undertaking for purpose of computing capital gains that is arisen on transfer of asset as a going concern and is directed to value it as per section 55 of the act Ld.AO is also directed to grant indexation while computing capital gains. Ld.AO is also directed to decide the depreciation on block of assets and the capital gains has to be computed in accordance with section 45 to 50 of the Act. Accordingly, we allow this ground raised by assessee. Software expenses under section 40(a)(ia) - HELD THAT:- As the issue is against assessee by decision of Hon ble Karnataka High Court in case of CIT vs Samsung Electronics Ltd [ 2009 (9) TMI 526 - KARNATAKA HIGH COURT] as held h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices. viii) Whether while seeking the exact comparability as mentioned above the DRP was right in fact and in law in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin. ix) Whether the Hon'ble DRP is correct in fact and law in disregarding the position of law that there could be differences between the enterprises compared under the TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises? (x)For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. xi) The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above. ITA No. 656/B/2016 I. Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another. 1. The learned Assessing Officer ( learned AO ), learned Transfer Pricing Officer ( learned TPO ) and the Honourable Dispute Resolution Panel ( Hon'ble DRP ) grossly erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught to have been included as comparables: Akshay Software Technologies Ltd . Comp-U-Learn Tech India Ltd. Helios and Matheson Information Technology Ltd. LGS Global Limited Maveric Systems Ltd. Silverline Technologies Ltd. Thinksoft Global Servic s Ltd. Evoke Technologies Ltd. R S Software (India) Ltd. 13. Marketing Support Services 13.1. The learned AO/learned TPO/Hon'ble DRP has grossly erred in not rejecting Asian Business Exhibition Conferences Ltd. as it is functionally dissimilar to the Appellant. 13.2. The learned AO/learned TPO/Hon'ble DRP has grossly erred in rejecting companies that ought to have been included as comparables: Concept Communications Ltd. Gradiente Infotainment Ltd. Quadrant Communications Ltd. Sporting Outdoor Ad-Agency Pvt. Ltd. Cyber Media India Online Ltd. 14. The learned AO/learned TPO/Hon'ble DRP has erred in making the following errors in the computation of working capital adjustment: a. by not considering the fact that the Appellant does not have any working capital risk, therefore, no negative working capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed AO and the Hon'ble DRP has erred in placing reliance on the ruling of the Mumbai Tribunal in the case of Premier Automobiles which has been subsequently reversed by the Bombay High Court (264 ITR 193). B. Net worth Computation 15.9. The learned AO and the Hon'ble DRP has erred in not applying the provisions of section 50B of the Act for computing net worth of the undertaking. 15.10. The learned AO and the Hon'ble DRP has erred in holding that the value of assets transferred cannot be identified since the list of assets as per Business Transfer Agreement ('BTA') entered into by the Assessee with Intel Mobile Communications Private Ltd ('Buyer') does not match with the valuation report obtained by the Buyer. 15.11. The learned AO and the Hon'ble DRP has further erred in holding that the Appellant has not been able to explain the difference between BTA and valuation report without even providing a copy of the valuation report to the Appellant. 15.12. The learned AO and the Hon'ble DRP has erred in placing reliance on the valuation report submitted by the Buyer without appreciating the fact that certain assets have not bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned AO and the Hon'ble DRP has erred in treating the capital gains as short term as the assets held are depreciable assets whereas the Assessee has transferred assets, employees, customer contracts etc. 15.24. The learned AO and the Hon'ble DRP has erred in concluding that the capital gains arising from sale of wireless division as short term capital gain when the division was in existence for more than 36 months. D. Filing of Form 3CEA 15.25. The learned AO and Hon'ble DRP has erred in holding that the form 3CEA obtained from the Chartered Accountant is not in the correct format as prescribed by the Act and Income Tax Rules, 1962 ('Rules'). 15.26. The learned DRP has erred in holding that Form 3CEA was not found to be certified by the Chartered Accountant in regard to correctness of net worth of the undertaking without stating any reasons why Form 3CEA is not correct. 15.27. The learned AO and Hon'ble DRP has failed to appreciate that the additional statement made by the Chartered Accountant in Form 3CEA is only a generic disclosure as a part of the certification process. 15.28. The learned AO and the Hon'ble DRP has e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich representative of assessee appeared before Ld.AO and filed requisite details as called for. 3. Ld.AO observed that assessee has entered into international transaction exceeding ₹ 15 crores and accordingly, case was referred to Transfer Pricing officer for determining arms length price of international transactions entered into by assessee with its associated enterprise. 4. Upon receipt of reference under section 92CA of the Act, Ld.TPO called upon assessee to file economic details in Form 3 CEB. In response to the notice, assessee filed requisite details from which Ld.AO observed that assessee had following international transactions: S.No International transaction Amount(INR) 1 Provision of software development services 1,858,350,560 2 Provision of marketing support services 46,468,176 3 Purchase of fixed assets 351,596 4 Reimbursement of Expenses 11,510,092 5. Ld.TPO observed that assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Average 8.22% 7. Ld.AO was of the opinion that, comparables used by assessee do not pass its own filters and that data used in computing arm s length price is not reliable and correct. Ld.TPO thus proceeded to determine arm s length price by conducting independent search for comparables, considering new set of filters. Ld.TPO selected following comparables under both segments Software Development Service Segment S.No Name PLI 1 Acropetal Technologies Ltd.(seg) 31.98% 2 e zest solutions 21.03% 3 E-infochips Ltd 56.44% 4 Evoke 8.11% 5 ICRA Techno Analytics Ltd. 24.83% 6 Infosys Ltd 43.39% Marketing support service segment S.No Name of the Company OP/Cost(%) 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P) Ltd vs DCIT reported in (2019) 109 Taxmann.com 335 for same assessment year. Both sides submitted that issues raised and comparables alleged for inclusion by revenue in their appeal are identical and similar. 14. In cross appeal filed by assessee, it seeks exclusion of certain comparables under software development service segment mentioned in Ground 12.1 and 12.2. Assessee also seeks inclusion of RS software (India) Ltd. 15. For Marketing Support Services, assessee seeks exclusion of Asian Business Exhibition Conferences Ltd., under ground 13.1 and, inclusion of concept communication Ltd., and Cyber Media India online Ltd., in Ground No. 13.2. 14. Before we undertake comparability analysis, it is sine qua non to understand functions performed, assets employed and risks assumed by assessee under both these segments. A. Software development service segment: Functions: In TP study at page 724 of paper book, assessee has been stated to be involved in business of software research and development services, that involves designing software to configure hardware, testing of products designed, validation of products tested, debugging operations if required. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s segment. Assessee is reimbursed by its associated enterprises on cost plus basis. The associated enterprise also funds assessee by means of providing interest-free loans and advances for mitigating the financial risk under this segment. Characterisation: Thus, based on FAR analysis under both these segments, assessee is identified to be a low risk captive service provider providing software research development and market support services only to its associated enterprises. We shall first take up Revenue s appeal. Ground no. (i) (v) Ld.CIT.DR submitted that DRP applied on-site revenue filter selectively, instead of applying in respect of all comparables. It has been argued that application of a filter determines what set of comparables would be displayed on database, on which search is carried out. Application of filter to shortlist companies under a particular segment is 1st step to conduct transfer pricing analysis. She vehemently argued that, once comparables are shortlisted by Ld.TPO, DRP cannot suo moto apply on-site revenue filter subsequently and exclude comparables, which is not as per procedures laid down under law. Ld.CIT.DR submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting TP analysis. However, on perusal of observations by DRP to exclude Acropetal Technologies Ltd., L T Infotech Ltd., primarily on functional dissimilarities and absence of segmental information. DRP also observed that these comparables are not a contract service provider like assessee( para8,18 of DRP order). Therefore, in our considered opinion, these grounds raised by revenue becomes academic 8.6. Decisions relied upon by Ld.CIT DR of Delhi Tribunal in case of DCIT vs Vertex customer services in ITA No.5228/Del/2018 (supra) and Aircom International India Pvt. Ltd., (supra) does not deal with on-site revenue filter as has been submitted by Ld.CIT DR. 8.7. On merits, Ld.CIT DR relied upon decision of coordinate bench of this Tribunal in case of Mercedes-Benz Research and Development India Pvt Ltd., vs ACIT reported in (2018) 90 Taxmann.com 300 and submitted that these comparables were sent back to Ld.TPO for re-examination. She thus submitted that, view taken by coordinate bench of this Tribunal in Mercedes-Benz Research and Development India Pvt. Ltd., vs ACIT (supra) may be followed. 8.8. We have perused view of coordinate bench of this Tribunal in case of Merce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submits that the assessee seeks exclusion of L T Infotech Limited and Persistent Systems Limited, due to more details being now available in the public domain which render these two companies as not comparable to the assessee and therefore prays that they be excluded from the list of comparable companies. 16.4 Per contra, the learned Departmental Representative for revenue objected to the admission of this additional ground stating that when the assessee itself has selected these two companies, the authorities below had no occasion to consider the objections now raised by the assessee before the Tribunal. 16.5 After having heard both parties and perused and considered the material on record, we find that the functional comparability of these two companies i.e. (i) L T Infotech Limited and (ii) Sasken Communication Technologies Limited have been considered by benches of this Tribunal in various cases, including those cited by the ld.AR. By way of this additional ground, the assessee is raising objections to the inclusion of these companies on the issue of functional dissimilarity and other grounds. In our considered view, the assessee cannot be precluded from raising a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 2011-12. We, therefore do not find any reason to deviate from aforestated view. Thus, in our considered opinion, Acropetal Technologies Ltd., L T Infotech Ltd., are not functionally similar with that of assessee, who is a contract service provider, working on a cost plus business model. Ld.TPO is directed to consider RS Software Ltd. in final list Accordingly, Ground no. (i) (v) stands partly allowed. Ground No. (vi) is in respect of excluding M/s.E-Infochips, by DRP as comparable on the ground that it fails service income filter. Ld.CIT DR submitted that TPO while analysing comparables observed that this company has revenue from software development up to 88% and therefore included, whereas DRP observes that revenue earned by this company is less than 75% and thus excluded. She submitted that, basis of determining revenue by DRP being less than 75% has not been demonstrated and therefore needs to be reconsidered. Ld.AR, on the other hand placed reliance upon decision of coordinate bench of this Tribunal in case of Autodesk India Pvt Ltd. vs ACIT (supra) wherein, E- Infochips Ltd was excluded for failing service income filter. We have perused submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts exclusion only on the 2nd ground. In other words, the revenue has not challenged its exclusion on the other grounds stated hereinabove and thus its exclusion on these grounds have attained finality and cannot be disturbed by this Hon ble Tribunal. Even otherwise, we are of the view that the DRP rightly arrived at the finding that companies software development service revenue for FY 2010-11 was less than 75% of its total operating revenue for the year. Thus the above action of the DRP in rejecting the above companies correct. 9.3. In the facts before us, revenue is challenging exclusion of this comparable as DRP recorded finding in respect of service income being less than 75%. Other issues considered by DRP in respect of extraordinary event and no segmental information is available has not been challenged before us (page 11 of DRP order). Respectfully following the view taken by coordinate bench of this Tribunal in DCIT vs M/s.CGI Information Systems and Management Consultations Pvt.Ltd (supra), we direct Ld.TPO to exclude this company. Admittedly, manner in which DRP passed directions in respect of alledged comparables in these grounds are similar and iden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is engaged in rendering outsourced product development, as against software development services. It has been submitted that this is not functionally similar with that of assessee. Ld.CIT DR on the contrary supported view of authorities below and opposed exclusion. We have perused submissions advanced by both sides in light of the records placed before us. It is observed that annual report of this company is placed at page 777- 972 of paperbook pertaining to Annual Reports wherein, Schedule 15 forming part of profit and loss account shows income from sale of software services and products, however there is no separate segmental information in respect of these 2 segments. Thus it is clear that this company is earning revenue from activities which includes licensing of products, royalty on sale of products as well as income from maintenance contracts etc which could not be considered functionally similar with that of assessee holders only carrying out software development service at the behest of its AE s on a captive basis. Similar view has been taken by this Tribunal in case of DCIT vs Electronics for Imaging India Pvt.Ltd (supra). Respectfully following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is observed that Ld.TPO considered the consolidated figure appearing in profit and loss account, instead of considering segmental profits from software services of this company. We therefore set aside this comparable to Ld.AO/TPO to verify whether this comparable is functionally similar to assessee in the service segment. In the event it is found to be functionally similar to assessee Ld.AO/TPO is directed to recompute segmental margins of this comparable in accordance with law for considering it in the final list. Needless to say that proper opportunity of being represented shall be granted to assessee. Accordingly this comparable is set aside to Ld.AO/TPO. Market Support Service Segment Ground No.13.1 is for exclusion of Asian Business Exhibition Conferences Ltd. Ld.AR raised objection regarding functional comparability of this comparable with assessee. It has been submitted that this company derives revenue from sale of stall space in exhibition and events, commission due to advertisement insertions in external publications, sponsorship, delegate fees and income from entry charges vis- -vis, assessee, which is engaged in provision of marketing support service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He supported the orders passed by authorities below as this company is functionally different with assessee. We have perused submissions advanced by both sides in light of records placed before us. It is noted that authorities below have not analyse similarities/dissimilarities in FAR of this comparable with assessee. We accordingly set aside this comparable back to Ld.AO/TPO verify the same. Needless to say that proper opportunity of being represented shall be granted to assessee. Accordingly this comparable is set aside to Ld.AO/TPO. Accordingly this ground raised by assessee stands allowed for statistical purposes. Ground No.14 A-B: Working capital adjustment Ld.AR submitted that Ld.TPO erred in restricting working capital adjustment to 1.63% which is average cost of capital of comparable companies selected by Ld.TPO. It has been submitted that no basis has been provided by Ld.TPO in determining working capital adjustment at 1.63%. Ld.AR also submitted that upholding working capital adjustment being restricted at 1.63% is against view taken by various decisions of this Tribunal. He submitted that Ld.TPO is duty bound to give adjustment based on differenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es is submitted that the research and development Centre comprises of automated solutions, chip card solutions, wireless solutions and electronic technology solutions. Ld.AR submitted that from above units the wireless solution units carries out research development design and validation and certification of the product specific information which was sold to Intel mobile communications private limited for a lump sum consideration of ₹ 98,57,41,680/- as a going concern basis. Assessee treated the resultant gain arising on slump sale as long term capital gain as undertaking was held for a period of more than 36 months and consequently offered the same to tax under section 50 B of the act for year under consideration. Ld. AO while passing assessment order rejected the gain on sale of wireless division as slump sale for following reasons: according to Ld.AO transfer of wireless division was not slumped sale as all assets and liabilities were not transfer. Ld.AO observed that assets such as cash, bank deposits, proprietary information, tangible assets, work in progress, semifinished goods, inventory etc and liabilities such as loan, creditors, employee liabilities etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are working. Placing reliance on page 2186-2221 of paper book, Ld.AR submitted that total block wise and itemise details of assets tallies with page 2184. As regards the requirement to file Form 3CEB, Ld.AR submitted that during the relevant year there was no requirement to file such form electronically. He also submitted that a certification was issued by accountant which is placed at page 2182 however the same has been held to be not correct by authorities below. Ld.AR has further argued that assessing officer erred in considering the value in accordance with the valuation report filed by the buyer. He submitted that the manner in which buyer assigns value to the assets in its books of account cannot be the basis to determined the value of assets in the hands of assessee. It has been submitted by Ld.AR that the buyer has submitted list of assets that has been excluded with Ld.AO which shows that all the assets transferred by assessee has not been considered in the valuation report. He submitted that the valuation adopted by the buyer is not in accordance with the mechanism provided under the Act, to determined the net worth of undertaking. He thus submitted that the mismatc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined by reducing the value of liabilities of an undertaking from their great value of all assets of the undertaking, provided that there is no itemised sale of assets and liabilities between the party and instead there is one lump sum value of undertaking. The methodology for determining net worth has been given in Explanation 1 read with Explanation 2 of section 50 B. According to these provisions, aggregate value of total asset is reduced by value of liability of such undertaking. The aggregate value of asset and the value of liability as per Explanation 2, is the written down value of depreciable assets, book value of other assets and the book value of all the liabilities. Thus while computing capital gains from transfer of undertaking it has to be all the assets and all the liabilities. In the details of block wise and itemise assets placed at page 2186-2220 of paper book, we note that assessee has given all details regarding the date of acquisition the cost of acquisition the depreciable value as on the date and the written down value as on the date of slump sale in regards to the assets. Further at page 13 64 of paper book we note that scheduled 10 to Profit and L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an entire undertaking as a going concern and assessing officer should have computed the capital gains under section 45 to 50 of Income tax Act. Ld.AO has also not identified the items that have been sold independently but has considered the lump sum valuation made by the buyer in the hands of assessee which is not in accordance with the provisions of the act. We therefore direct Ld.AO to compute the quantum of capital gains in accordance with law as a slum sale. Ld.AO is directed to decide the cost of undertaking for purpose of computing capital gains that is arisen on transfer of asset as a going concern and is directed to value it as per section 55 of the act Ld.AO is also directed to grant indexation while computing capital gains. Ld.AO is also directed to decide the depreciation on block of assets and the capital gains has to be computed in accordance with section 45 to 50 of the Act. Accordingly, we allow this ground raised by assessee. Ground No. 16: It has been submitted that Ld.AO disallowed software expenses under section 40(a)(ia) of the Act amounting to ₹ 24,13,306/- on the basis that no tax has been deducted at source. Ld.AR submitted that payments of ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
