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TMI Blog2020 (5) TMI 407X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the Ld. AO did not issue to Applied Materials India Private Limited ('the Appellant or 'the Company'), a show cause notice as per proviso to section 92C(3) of the Act. 1.2 The Ld. AO has erred in law in making a reference to the Deputy Commissioner of Income Tax (Transfer Pricing) - 1(1)(1) ['Ld. TPO'], inter alia without recording an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. Accordingly, the order passed by the Ld. TPO is without jurisdiction. 1.3 The final assessment order passed by the Ld. AO is without jurisdiction, inter alia, in so far as it purports to give effect to invalid directions of the Dispute Resolution Panel ('Ld. Panel'). 1.4 The order passed by the Ld.AO is without jurisdiction, inter alia, in so far as it incorporates the adjustment proposed in an invalid order passed by the Ld. TPO. 2. The Ld. Panel and Ld. AO/ Ld. TPO has erred in justifying the motive of shifting of profits On the facts and in the circumstances of the case and in law, the Ld. Panel and Ld. AO/ Ld. TPO erred in not demonstrating that the motive of the Appellant was to shift profits o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyed and risk assumed by the Appellant vis-à-vis the companies selected as being comparable. 5.2 The Ld.AO/Ld.TPO erred in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant without establishing functional comparability and the Ld. Panel also erred in confirming the same. 5.3 The Ld.AO/Ld.TPO erred in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. The Ld. Panel also erred in confirming the same. 5.4 The Ld. Panel erred in upholding the action of the Ld.AO/Ld.TPO in not applying the turnover filter at the upper limit so as to reject the high turnover companies selected by the Ld.AO/Ld.TPO. 5.5 The Ld.AO/Ld.TPO, while applying the said turnover filter at the lower limit so as to reject companies having turnovers less than INR 1 crore in FY 2012-13, erred in not applying the said filter at the upper end so as to reject high turnover companies as well. The Ld. Panel also erred in confirming the same. 5.6 The Ld.AO/Ld.TPO grossly erred in deviating from the uncontrolled party transaction definition as per the Income-tax Rules and in arbitrarily applying a 25% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not appreciating the fact that Larsen & Toubro Infotech Limited and Persistent Systems Limited were held by the Hon'ble Tribunal to be functionally incomparable to the Appellant in the earlier assessment years, i.e. AYs 2010-11 and 2011-12, and that, therefore, they ought to be excluded from the list of comparables for this assessment year as well as they continue to be functionally incomparable to the Appellant. 5.16 In directing the exclusion of Tech Mahindra Ltd. from the list of comparables, the Ld. Panel erred in not accepting the other contentions put forth by the Appellant for exclusion of the said company as well. 5.17 The Ld.AO/Ld.TPO erred in considering Provision for Doubtful Debts as a non-operating item while computing the margins. The Ld. Panel erred in upholding the same. 5.18 The Ld.AO/Ld.TPO erred in considering data obtained u/s 133(6). The Ld. Panel erred in upholding the actions of the TPO. 6. Non-allowance of appropriate adjustment to the comparable companies by the Ld. Panel and Ld.AO/Ld.TPO 6.1 The Ld.AO/Ld.TPO erred in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (i) accounting practices, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l thereto. 12.2 The Appellant desires leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of objections, at any time before or during the hearing of the Appeal. The Appellant submits that the above grounds are independent of and without prejudice to one another. Brief facts of the case are as under: 2. Assessee is a company and filed its return of income for year under consideration on 29/11/2013 declaring total income of Rs. 37,11,50,990/-. The case was selected for scrutiny and notice under section 143(2) was duly served on assessee calling for various details in connection with the return filed. Representative of assessee appeared before Ld.AO in response to statutory notices and filed various details. Ld.AO observed that assessee had entered into international transaction with associated enterprise exceeding Rs. 15 crores and accordingly the case was referred to Transfer Pricing officer to determined arm's length price of the transaction. Upon receipt of reference under 92C of the Act, Ld.TPO called upon assessee to file economic details of international transaction in Form 3 CEB, in respect of international transaction an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.10 3. Helios & Matheson Information Technology ltd. 26.06 4. RS Software (India) ltd. 18.19 5. R Systems International ltd. 28.27 6. Sasken Communication Technologies Ltd 17.41 7. Ybrant Digital Ltd. 18.72 AVERAGE MARK -UP 20.90 7. Further, while computing PLI of assessee, Ld.TPO was of the view that subcontracting charges of Rs. 81,29,78,005/- during relevant financial year, paid by assessee to 3rd parties towards provision of software development services, formed part of assessee's operating cost. He thus included subcontracting charges in operating cost, thereby increasing assessee's margin to 15.38%. Ld.TPO thus proposed the adjustment in the hands of assessee being difference between recomputed margin of assessee and the average margin of comparables finally selected by assessee at Rs. 27,56,77,176/-. Aggrieved by proposed adjustment by Ld.TPO, assessee raised objections before DRP. 8. Before DRP assessee filed various details in support of its contentions against inclusion of subcontracting charges as operating cost in the hands of assessee as well as wrong selection of comparables under software development service segment by Ld.TPO. 8.1. DRP after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly against assessee. 11.2. Ld.CIT DR placed reliance upon the orders passed by this Tribunal in assessee's own case in preceding assessment years. 11.3. We have perused submissions advanced by both sides in light of records placed before us. It is observed that this issue now stands settled against assessee in assessee's own case wherein this Tribunal decided by making following observations. We refer to and rely upon observations by this Tribunal in assessee's own case for 2012-13 (supra): "10. We heard the learned Departmental Representative on this issue and perused the record. We noticed that identical issue was considered by the coordinate Bench of the Tribunal in assessee's own case for assessment year 2011-2012 in IT(TP)A No.17/Bang/2016 dated 21.09.2016 and the same has been decided against the assessee with the following observations:- "7. We have considered the rival submissions as well as the relevant material on record. Undisputedly, the assessee is charging a mark up on the software development services provided to the AE being captive service provider. Therefore the assessee is not acting as an agent or distributor of the AR but is a provider of services of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard assessee employed services of 3rd party service providers (eg: Tata consultancy services, Satyam Computer services, ASM Technologies Ltd etc.,) for sub contracting specific part of their work. Core activities of software development cycle are conducted in house by assessee and a part of non-core activities are subcontracted to third-party service provider. At page 403 summary of role played by assessee and the contractor's in development cycle has been summarised as under: It has been submitted that activities like development (coding), engineering, bug fixing are sub contracted. It is also been submitted that assessee along with subcontractors work together as one team and render services to the U.S. AE. B. Assets employed: It has been submitted that assessee do not own any routine valuable intangible assets and any intangible created during the performance of such software development services would be owned by the U.S. AE. C. Risks assumed: It has been submitted that assessee bears limited risk such as foreign exchange risk, technology risk and human capital risk. It has been submitted that assessee is insulated from majority of business risk and is engaged in rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for exclusion. We have perused submissions advanced by both sides in light of records placed before us. We also perused decision relied upon by Ld.CIT DR in case of M/s Metricstream Infotech (India) Pvt.Ltd (supra),. It is noted that this Tribunal excluded this comparable for the reason that nature of services are doubtful. Before us, Ld.AR has not been able to establish correct nature of business carried out by this company or provide with segmental information is in respect of various services provided by this company to its clientele. The background of this company mentioned at page 1643 suggests that it is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and overseas. However in the profit and loss account note 20 reveals that income from software services forms the major part of revenue generation which is supported by note 29 wherein, assessee has earned in foreign currency from export of software services. On combined reading of these it is clear that assessee has no doubt earnings from rendering of services services outside India, however it is uncertain whether the entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excluded for being functionally different by Ld.TPO himself. On the contrary, Ld.CIT DR submitted that this comparable has got segmental details in respect of software development services as well as BPO services which is apparent from the annual reports placed at page 1173-1222 of paper book. Referring to page 1202, Ld.CIT DR submitted that Ld.TPO has considered software service segment for comparing with assessee in the present facts of the case. We have perused submissions advanced by both sides in light of records placed before us. It is observed from the annual report at page 1198 revels that this company recognises income from software development services, products. Further we note that total revenue from operations at page 1196 is Rs. 8,69,20,713/- , whereas page 1209 shows revenue from operations to be Rs. 23,05,27,224/-. At both these pages for break up of revenue from operations reference is to scheduled 3.01 schedule 3.01 at page 1202 that revels break up of revenue from operations being software services amounting to Rs. 8,54,77,282/- and revenue from business process outsourcing services amounting to Rs. 14,43,431/-, totalling to Rs. 8,69,20,713/-. Also from the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovider like assessee. We therefore direct the Ld. AO/TPO to exclude this comparable from the final list. c) Persistent Systems Ltd It has been submitted that this comparable has been included by Ld.TPO even though it was objected by assessee for functional dissimilarities. Ld.AR submitted that this company is engaged in both product and development of software development services and therefore cannot be compared to a contract software development service provider like assessee. It is also been submitted that there are significant research and development expenditure that resulted in global patents and company owns significant intangibles which has either been developed or have been acquired from 3rd parties as a part of growth strategy. Ld.AR submitted that on these para meters this comparable cannot be compared to a limited service provider like that of assessee. Further it has been submitted that this comparable stood excluded by decisions of this Tribunal in assessee's own case for assessment year 2011-12 and 2012-13(supra). On the contrary, Ld.CIT.DR submitted that, in case of CGI Information Systems and management Consultants Pvt.Ltd vs DCIT reported in (2019) 101 taxma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Tribunal has set aside this comparable to the file of Ld.TPO for fresh decision. She submitted that in case of CGI Information Systems and Management Consultants Pvt Ltd (supra) this Tribunal relying upon the case of Advice America Software Development Centre (P) Ltd reported in (2018) 94 Taxmann.com 179 and observations made therein. She thus submitted that this comparable should be sent back to Ld.TPO for verification. We have perused submissions advanced by both sides in light of records placed before us. We have also perused decisions relied upon by Ld. CIT DR in order to understand the reasoning been this Tribunal for setting aside this comparable to Ld.TPO. There is no doubt that this comparable ease a software development service provider. However, this comparable owns intangibles unlike assessee who is a contract service provider that functions in accordance with and guidelines given by its associated enterprises. Even though assessee is also involved in software development life cycle, the contribution that it makes in the development is very limited to the extent of certain research activities and support services that it does at the behest of its associated enterpris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails of accessories that has been categorised to be forming part of computer peripherals. 13.4. Accordingly we set aside this issue back to Ld.AO/TPO for verifying the actual use and nature of Xerox machines and the accessories that has been considered as computer peripherals. In the event it is ascertained able that these accessories and Xerox machines could not be independently used but could only be used on being attached to computer 60% depreciation should be allowed. Insofar as racks, batteries and stabilisers are concerned these do not fall within the category of computer peripherals and we uphold the depreciation being allowed only at 15%. Accordingly this ground raised by assessee stands partly allowed. 14. Ground No. 9 This ground is been raised by assessee for not granting MAT credit. It has been submitted that for year under consideration, assessee filed its return of income declaring total income of Rs. 37,11,50,990/- under normal provisions of the Act. Assessee had claimed mat of Rs. 6,03,57,367/-being credit bought forward as on 01/04/2013. It has been submitted that Ld.AO failed to grant the credit that was available to assessee. On raising objections before DR ..... X X X X Extracts X X X X X X X X Extracts X X X X
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