TMI Blog2020 (11) TMI 464X X X X Extracts X X X X X X X X Extracts X X X X ..... purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits - we direct the TPO/A.O with similar directions to grant Working Capital Adjustment. Disallowance u/s 14A r.w.r. 8D - HELD THAT:- 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, we direct Ld.AO to delete addition made under section 14 a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92CA of the Act 2.1 Rejection of the transfer pricing documentation of the Appellant 2.1.1 The Honorable DRP and the learned AO/TPO have erred in law and on facts by rejecting the Transfer Pricing ( TP ) documentation which has been prepared by the Appellant with respect to Information Technology ( IT ) Information technology enabled service ( ITES ) segment, in the manner contemplated under the relevant provisions of the Act and the Income-tax Rules, 1962 ( the Rules ). 2.1.2 The Honorable DRP and the Learned AO/TPO have erred in law in rejecting the TP Study of the Assessee as not reliable or correct , under Section 92C(3) of the Act, merely because the learned TPO did not agree with the positions and filters adopted by the Assessee in its TP Study and adopted certain additional filters / modified filters in selecting the comparable companies by using non contemporaneous data of the said companies. Rejection of the comparability analysis undertaken by the Assessee 2.1.3 The Honorable DRP and the learned AO have erred in law in confirming the actions of learned TPO in conducting a fresh search for comparable companies and by rejecting the search process carried ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct / intangible led revenues, inadequate financial information, use of unreliable segment financials, extra ordinary events / business restructuring, abnormal year, judicial precedents etc. (i) Infobeans Technologies Limited (ii) Larsen Toubro Infotech Limited (iii) R S Software (India) Limited (iv) Aspire Systems (India) Private Limited (v) Cybage Software Private Limited (vi) Infosys Limited (vii) Inteq Software Private Limited (viii) Mindtree Limited (ix) Nihilent Technologies Limited (x) Persistent Systems Limited (xi) Rheal Software Limited (xii) Tata Elxsi Limited 2.8 Companies sought for inclusion by the Assessee during the course of assessment proceedingsin respect to IT service segment The Honorable DRP and learned AO / TPO have erred in law and on facts in rejecting the following comparable companies requested for inclusion by the Assessee during the course of assessment proceedings: (i) Akshay Software Technologies Limited (ii) Caliber Point Business Solutions Limited (Segmental) (iii) Sagar Soft India Limited NC (iv) TVS Infotech Limited (v) Bells Softech Limited (vi) Daffodil Software Limited (vii) Evoke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting that the Assessee operates at less than normal risks as compared to comparable companies, which carry higher risks and accordingly erred in not granting appropriate risk adjustments. 2.12.2 The Honorable DRP and learned AO / TPO have erred in concluding that there exists a single customer risk and that such a risk nullifies any risk adjustment that could be provided. Further, the Honorable DRP and learned AO / TPO have erred in concluding that there is no reliable method to compute the risk adjustment. 2.12.3 The Honorable DRP and learned AO / TPO have erred in law and on facts by not providing reasons for rejecting the methodology/workings provided by the Assessee for computing the risk adjustment. 3. Other TP related grounds 3.1 The Honourable DRP and the Learned AO/ TPO have failed to appreciate the Appellant s commercial judgment about the application of arm s length principle which is tied to the business realities. 3.2 The Honourable DRP and the Learned AO/ TPO have erred in law and on facts, in making several observations and findings, which are based on incorrect interpretation of law and contrary to facts of the case. 3.3 The Honourable DRP and the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Appellant. 5.3 The Honorable DRP and the Learned AO have erred on facts in holding that the Appellant had entered into a Secondment Agreement with GS Co, whereas no such agreement exists between the assesse and GS Co. 5.4 The Honorable DRP and the Learned AO have erred on facts by not appreciating that the payment was not towards rendition of any service but represents mere reimbursement of salary and other related costs on a cost-to-cost basis. 5.5 The Honorable DRP and the Learned AO have erred in law and on facts in concluding that the reimbursement of salary costs to GS Co amounted to payment towards Fees for Technical Services ( FTS ) under explanation 2 to section 9(1)(vii) of the Act. 5.6 The Honorable DRP and the Learned AO have erred in law and on facts in concluding that the aforesaid reimbursements paid by the Appellant to GS Co are also taxable as FTS or as Fees for Included Services ( FIS ) under the double taxation avoidance agreement between India and USA and consequently holding the Appellant liable to deduct tax at source under section 195 of the Act, from the said payments. 5.7 The Honorable DRP and the Learned AO have erred in law a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and 142(1) of the Act were issued. On perusal of the Form No.3CB filed by the assessee, the Assessing Officer found there are international transactions with its AEs, and with prior approval of Prin.CIT-3, the matter was referred to the Transfer Pricing Officer (TPO) for determination of Arm s Length Price (ALP).The assessee has filed the TP Study report, and as per the report in the F.Y. 2014-15, it has received an amount of ₹ 880,96,98,062/- from its AEs outside India in respect of software development services and the margin computed on operating cost worked out to 16%.The assessee has adopted TNMM as Most Appropriate Method (MAM), Whereas the Assessing Officer required the details as per the provisions of Section 92D of the Act along with financials, Annual Reports and copies of agreements. The assessee company has selected 14 comparables in software development services and 11 comparables in ITES as per the TP documents. The TPO has issued show cause notice to the assessee on rejection of TP Study and the assessee has filed objections, submissions referred at Para 5.3 of the T.P. Order. The TPO after rejecting the TP Study has applied the filters to the software develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta in Public Domain 34.18 13 Inteq Software Pvt. Ltd. 31.16 45.00 Fads Employee cost filter 37.90 14 Infosys Ltd. 40.29 36.28 39.25 38.59 15 Thirdware Solution Ltd. 43.69 44.68 32.65 41.12 16 Cybage Software Pvt. Ltd. 68.17 68.82 60.81 66.27 35th Percentile 20.55% Median 27.37% 65th Percentile 37.90% 4. In ITES Segment, the TPO has selected 11 comparables referred at page 81 of the T P Order as under: S.No. Company Name F.Year wise OP/OC Wt. Average 2014-15 2013-14 2012-13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iculars Formula Amount (in Rs.) Taxpayer's operating revenue OR 8,67,78,00,000 Taxpayer's operating cost oc 7,48,10,00,000 Taxpayer's operating profit OP 1,19,68,00,000 Taxpayer's PLI PLI=OP/OC 15.00% 35th Percentile Margin of comparable set 20.55% Adjustment Required (if PLI 35th Percentile) Yes Median Margin of comparable set M 2737% Arm's Length Price PLI=(1+M)*OC 9,52,85,49,700 Price Received OR 8,67,78,00,000 Shortfall being adjustment ALP-OR 85,07,49,700 22.4.2 The above shortfall of ₹ 85,07,49,700 is treated as transfer pricing adjustment a/s 92CA in respect of software developm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DRP in the software development services segment considered the objections and directed the TPO to include comparables Cignity Technologies Limited, Sasken Communication Technologies Ltd. and no Working Capital Adjustment was granted to the assessee and the order was passed under Section 144C(5) of the Act on 27.09.2019.Subsequently,the final assessment order giving effect to the directions of DRP confirming the Transfer Pricing Adjustment to the extent of ₹ 61,43,50,100/- and disallowance under Section 14A of ₹ 1,37,500/-, deduction under Section 80G of the Act of ₹ 1,12,60,750/- and disallowance under Section 40 (a)(i) of the Act of ₹ 48,35,91,738/- with assessed the total income of ₹ 493,98,52,398/- was passed under Section 143(3) r.w.s.144C of the Act on 17.10.2019. Aggrieved by the order, the assessee has filed an appeal before the Tribunal. 6. At the time of hearing, the learned Authorized Representative mentioned though the assessee has raised various Grounds of Appeal, but they are restricted to the extent of arguments. The Ground of appeal No.5.3 pertains to secondment agreement and the assessee is inclined to be intervener with GS C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative relied on the order for the Asst. Year 2014-15 in IT(TP)A No.3244/Bang/2018 dt.29.01.2020 in assessee case at page 22 of the Tribunal order at para 5.1.2 read as under : 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 engaged in providing consultancy and testing services. Further it has been submitted that there is no segmental information available in the annual reports of this company. Ld.AR submitted that this company owns its own brand and have products and are engaged in trading activity. This company also has R D services and presence of huge intangibles and brands. On the contrary, Ld.CIT DR submitted that, this company should be remanded by following the view taken by coordinate bench of this Tribunal in case of CGI Information Systems and management consultants (P) Ltd. vs DCIT reported in (2019) 101 Taxmann.com 294. We have perused submissions advanced by both sides in light of records placed before us. Ld. CIT DR placed reliance on decision of CGI Informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. 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 ₹ 15,46,46,82,017/-, reveals that revenue earned from software services is mainly from offshore services. In the present case of assessee, there is no such expenses incurred for overseas staff costs. At page 2022 of paper book Volume 5, it is clear that export revenue from software services amounts to ₹ 44,14,84,25,372/- out of gross income of ₹ 46,43,94,03,178/-. In view of the aforestated observations for year under consideration, the issue of comparability of this company should be examined by Ld.AO/TPO afresh. Accordingly, we set aside this comparable back to Ld. AO/TPO. 9. But The learned Authorized Representative supported his arguments with the decision of the co-ordinate bench of this Tribunal for the A.Y. 2015-16 Yahoo Software India Pvt. Ltd. Vs. JCT (115 Taxman. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparable companies as held by the Hon ble Delhi ITAT in the case of Saxo India Pvt. Ltd. (supra) which decision was also confirmed by the Hon ble Delhi High Court. 39. The next company which the assessee seeks to exclude is Infosys Ltd. As far as this company is concerned, it is seen that the following are the functional dissimilarities brought to our notice:- Functionally dissimilar - owns intellectual properties, incurs significant R D costs onsite activity. - Engaged in diversified business activities. - Involved in development of software products in addition to software services. - Owns intellectual property rights. - Incurs significant research and development costs. - Carries out significant activities based on onsite business. - Owns products such as Finacle, Edge Verve and other product based solutions. Extra-ordinary event of merger with Infosys Consulting India Ltd. Segmental profit loss account not available. Commands substantial brand value. 40. The DRP, however, has not thought it fit to exclude this company by observing that this company has substantial pre-dominant revenue from software services and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts cannot be relied. The learned Authorized Representative relied on the decision of Nokia Seimens Networks India (P) Ltd. Vs. ACIT 70 taxmann.com 236 (Del), with observations at page 5 as under : Undisputedly the TPO has used segmental data of this comparable company relating to software development profit segment provided to him under section 133(6), which cannot be doubted without any cogent material brought on record by the assessee-company. Profit loss account of this comparable company apparently proves the profitability of software development services segment. Segmental data obtained by the TPO though not audited but to controvert this data, the assessee had not produced any material on record and as such, this company is a valid comparable for TP adjustment in this case. [Para 551 Considering the facts and submissions, we restore the comparable to the file of Assessing Officer for examination and verification of the facts and material. (iii) Mel star Information Technology Limited margin is 5.29%. The company has made profit in the current year and not a loss making company. Whereas the DRP has rejected the company, which has incurred loss in two years out of thre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econdment Agreement with GS Co. The assessee is inclined to be intervener with GS Co. in the Special Bench formed on this disputed issue. Since the matter has not attained finality and there are no observations of DRP on this pertinent issue. Accordingly, we restore this disputed issue to the file of DRP for examination and comments and allow the ground of appeal of the assessee for statistical purpose. 14. The LdAr argued Ground of Appeal No.2.12 in connection with non-granting of Working Capital Adjustment by TPO/A.O and relied on the assessee own case for the Assessment Year 2014-15 in ITA No.3244/Bang/2018 and the observations at page 40 Para 7 to 7.9 of the order which are read as under : 7. Ground No. 2.6-2.7 are in respect of computing incorrect operating margins of comparables by not granting appropriate working capital and risk adjustments. 7.1. It has been submitted by Ld.AR that working capital and risk adjustment has been denied to assessee on the ground that assessee failed to demonstrate such differences could have any impact on assessee s profit. It has been submitted by Ld.AR that the submissions advanced by assessee demonstrating computational impact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by DRP/TPO in case of certain comparables, ITAT Delhi Bench in case of ITO v E Value Servc.com, reported in [2016] 75 taxmann.com 195 held that, insisting on daily balances of working capital requirements to compute working capital adjustment is not proper, as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. 7.7. It must not be forgotten that transfer pricing analysis is estimation and not an exact science. One has to see that, reasonable adjustment must be made where ever it is needed, so as to bring both comparable and test party on same footing. In present facts of case, DRP may be correct in denying working adjustment due to unavailablity required data, however there is no merit in observations of DRP/TPO as supported by Ld.CIR DR, in denying working capital adjustment due to absence of details for working out adjustments in comparable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est Ltd. Vs. CIT 378 ITR 33 (Del) where the Hon'ble High Court has held that unless and until exempted income is received for the concerned assessment year, the provisions of Section 14A of the Act are not applicable.we find the co-ordinate Bench of the Tribunal in assessee own case in IT(TP)A No.3244/Bang/2018 for the Assessment Year 2014-15 has dealt at pages 46 47 para 8 of the order as under : 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 record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 883 the list of deductions claimed under Section 80G of the Act with a statement of donees along with PAN and address and donation receipts. Further the donation receipts are selfexplanatory and are eligible for deduction under Section 80G of the Act. We find that the CSR expenses are required to be incurred by companies as per Section 135 of the Companies Act and the deduction u/s. 37(1) of the Act, is not available from Assessment Year 2015-16 as per the Explanation 2 to Section 37(1) of the Act inserted by the Finance Act No.2. 2014.Whereas, the assessee company has made a claim for deduction of CSR expenses u/s. 80G of the Income Tax Act,1961.But the assessing officer has rejected the assesses claim without verifying the nature of contributions and observed that it is not a donation, and was not spent voluntarily for the eligibility of claim u/s.80G of the Act but due to legal obligation prescribed u/s. 135 r.w. Schedule VII of Companies Act, 2013.We find that the A.O has allowed deduction u/s.80G of the Act in respect of contribution made to PM Relief Fund which is not disputed. We are of the opinion that the A.O. has not made his observations clear that no CSR expenses are ..... 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