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TMI Blog2020 (4) TMI 883X X X X Extracts X X X X X X X X Extracts X X X X ..... mination of the Arm's Length Price of the international transactions to the TPO without demonstrating as to why it was necessary and expedient to do so. 3. The Income Tax Authorities have erred in not appreciating that, the addition made to the income returned is bad in law as the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X. 4. The Income tax authorities have erred in passing the Order without demonstrating that the Assessee had any motive of tax evasion. Ground relating to computation of ALP for the software development segment 5. The Income Tax Authorities have erred in: a. Relying on information collected u/s 133(6) of the Act without providing the Assessee the complete information or providing an opportunity to cross examine the companies concerned or their authorized representative in case of following companies; i. Nihilent Technogies Limited ii. Infobeans Technologies Limited iii. Cybage Software Private Limited b. Adopting a flawed process in issuing notices u/s133(6) and relying upon the replies thereto to compute the ALP; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sks, as against comparables, which assume these risks and therefore have to be credited with a risk premium on this account; and o. Not granting adjustment for working capital differential while computing the ALP. Ground relating to computation of ALP for the sales and marketing segment 6. The learned DRP has erred in confirming the action of the TPO in: a. Rejecting the transfer pricing analysis undertaken by the Assessee on unjustifiable grounds; b. Conducting a fresh transfer pricing analysis despite absence of any defects in the transfer pricing analysis submitted by the Assessee; c. Adopting inappropriate filterss like 25% RPT filter, one sided turnover filter, etc in the process of selecting comparables; d. Rejecting Priya International Limited as a comparable as selected by the Appellant in the TP study on unjustifiable grounds; e. Adopting companies as comparables even though they are not comparable in respect of functions performed, risks assumed, assets utilized, size, turnover, RPT filter, despite having unusual business circumstances or high margins, etc.; i) Ugam Solutions Pvt.Ltd ii. Axience Consulting Private Limited iii. Platinum Advertising P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the first quarter of FY 2014- 15 as Appellant's services are not liable for output tax; iii. Without appreciating the fact that, out of total service tax input written off of Rs. 61,37,356/- debited to the profit & loss account during the year, the Assessee received refund of Rs. 50,68,250/- on 10-Nov-17 and the same is offered to tax in the return of income for AY 2018-19 and refund of Rs. 716,171/- on 22-Oct-18 and same is offered to tax in AY 2019-20. iv. Without prejudice, the AU to be directed to exclude Service tax refund offered to tax in AY 2018-19 and AY 2019-20 from the total income of the respective years. GROUND RELATING TO INTEREST U/S 234A and 234B 9. The learned DRP and AO have erred in levying a sum of Rs. 75,28,600/- under section 234A and Rs. 6,00,80,838/- under section 234B respectively. In the facts and in the circumstances of the case, interest under section 234A and 234B is not leviable. The Assessee denies its liability to pay any further interest. Even otherwise, the interest calculated is excessive and incorrect. The Appellant submits that each of the above grounds/ sub-grounds are independent and without prejudice to one another. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 Akshay Software Technologies Limited 5.37% 6 Sasken Communication Technologies Limited (Segmental) 7.23% 7 Cigniti Technologies Ltd. 8.20% 8 CG-VAK Software a Exports Ltd 11.54% 9 Helios a Matheson Information Technology Limited 15.68% 10 R Systems International Limited (Segmental) 19.43% 11 SQS India BFSI Limited (formerly Thinksoft Global Services Ltd) (Consolidated) 19.63% 12 Larsen a Toubro Infotech Limited 23.54% 13 R S Software (India) Limited 25.46% 14 InfoBeans Technologies Limited 41.60% 35th Percentile Average Margin 5.37% , 13.03% Median 8.20% 65th Percentile 19.43% Sales and Support Service Segment S.No Name of the Company Weighted Average of adjusted Margins(OP/OC) 1 ICC International Agencies Ltd (Segmental) 2.85% 2 I C R A Management Consulting Services Ltd. 3.81% 3 Concept Public Relations India Ltd. 4.24% 4 Priya International Ltd (Segmental) 5.06% 5 Kestone Integrated Marketing Services Private Limited 7.62% 6 MCI Management (India) Limited 8.27% 7 India Tourism Development Corporation Ltd (Segmental) 11.48% 8 E D C I L (India) Ltd. (Segmental) 16.35% 9 Killick Agenci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment in the hands of assessee. Aggrieved by proposed adjustment, assessee raised objections before DRP. 7. DRP while giving directions to Ld.AO excluded hardware solutions Ltd, Intech software as it fails RPT filter for FY 2012-13 and FI 13-14. DRP accepted Cigniti and Sasken Communications as comparables under software development segment. 7.1. Regarding sales and support service segment, DRP excluded Irclass Systems and Solutions Pvt.Ltd, India Tourism Development Corporation Ltd and Killick Agencies and Marketing Ltd as comparable. 7.2. As regarding working capital adjustment DRP upheld the order of Ld.TPO even though this Tribunal in assessee's own case for assessment year 2013-14 directed Ld.AO to provide working capital adjustment. 8. On receipt of the directions by DRP, Ld.AO passed final assessment order by making addition in respect of transapprising adjustment amounting to Rs. 22,02,83,262/-. Ld.AO further made addition on account of service tax input return off amounting to Rs. 61,37,356/. The total income assessed by Ld.AO in the hands of assessee was Rs. 55,37,36,358/-. Aggrieved by order of Ld.AO, assessee is in appeal before us now. 9. Ld.AR submitted that ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and automotive to manage quality processes, corporate policies manage regulatory and industry-mandated compliance and corporate governance initiatives. Metric Stream India is a part of Metric Stream Inc. Its 99.65 percent of equity share capital is held by Metric Stream Inc. Accordingly, Metric Stream India shall constitute Metric Stream Inc.'s AEs by virtue of common control and capital. 12.1.1. From TP study at page 257 it is observed that assessee entered into an agreement with its associated enterprise in U.S. according to which assessee is to provide service in relation to information technology strategy, software development, testing, infrastructure management and technical support at cost plus basis. 12.1.2. It is observed that U.S. associated enterprise play significant role in determining business strategy of group including assessee and is responsible for all top management functions of corporate strategy, Treasury, legal and regulatory affairs and designing the policy with respect to its group operations including assessee. At page 260 of paper book, it is observed that no strategic functions are performed by assessee and is primarily performed the tactical manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital. It was under these circumstances that Ld.TPO applied only lower limit of turnover filter for excluding companies having turnover less than Rs. 1 crore. 13.3. Ld.CIT.DR submitted that when companies functionally similar to assessee, and is potentially comparable, the same cannot be excluded merely because of high or low turnover. Ld.CIT.DR placed reliance upon decision of Hon'ble Delhi High Court in case of Chriscapital Investment Advisers (India) Pvt. Ltd vs DCIT reported in [2015] 56 taxmann.com 417. We have perused submissions advanced by both sides in light of records placed before us. 13.4. We note that Ld.AO/TPO has applied filter of more than Rs. 1 crore, but did not put an upper limit to the filter. This Tribunal in case of Genesis Integrating Systems India Pvt Ltd vs DCIT reported in (2012) 53 SOT 159 and various other decisions have held that, companies having turnover in excess of Rs. 200 crores cannot be compared with companies having turnover less than Rs. 200 crore. This preposition has been accepted by Hon'ble Bombay High Court in case of CIT vs Pentair Water Pvt.Ltd., by order dated 16/09/2015 in ITA No. 18/2015. Hon'ble court upheld rejection of companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India (P.) Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years. Referring to page 710 of paper book volume to Ld.AR submitted that figures referred in the table reproduced herein below, shows drastic fluctuation, which do not indicate profit and loss resulting from operations of this company. Particulars FY 10-11 FY 11-12 FY 12-13 FY 13-14 FY 14-15 Operating Revenue 10,25,11,776 9,33,74,775 8,05,96,844 8,80,89,662 6,48,67,848 Operating Profit 3,93,45,616 3,90,57,071 31,60,967 2,34,38,726 16,70,562 OP/OR(%) 38.38% 41.83% 3.92% 26.61% 2.58% 14.1.1. From annual report it has been submitted that reason for such fluctuation is also not known. Ld.AR placing reliance on decision of Allscripts (India) Pvt.Ltd vs DCIT reported in (2015) 62 Taxmann.com 232, submitted that, if there is drastic fluctuation operating margins of a company with extreme high in one year and extreme low in other year's, the said company should be excluded as comparable, as it does not reflect normal operations. 14.1.2. Ld.CIT.DR, however submitted that though there is a fluctuating margin there is no dispute that this company is functionally similar to assessee and earns revenue from only one segment of software development services like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied Development Software (India) Pvt Ltd Purchase of Service - 21,28,568 Pureapps Consulting Services Pvt Ltd Rendering of Services - 2,75,148 Pureapps Consulting Services Pvt Ltd Purchase of Service 9,4 1,456 - Pureapps Consulting Services Pvt Ltd Expenses Reimbursed 15,398 17,088 Aspire Systems IL Rendering of Services 1,33,62,286 4,72,01,091 Ziffity Solutions private Limited Rendering of Services - 1,85,310 Ziffity Solutions private Limited Purchase of Service NA - 31,86,239 Asteor Software Private Limited Rendering of Services 56,36,220 19,29,302 Asteor Software Private Limited Purchase of Service 29,5 5,526 30,22,908 Aspiration Energy Private Limited Expenses Reimbursed - 20,528 Telesolar Solutions Pvt Ltd Rendering of Services 19,10,824 17,72,043 Telesolar Solutions Pvt Ltd Purchase of Service 1,95,000 - Mensa Foods Private Limited Purchase of Servicer' 82,80,470 1,14,01,737 Mensa Foods Private Limited Expenses Reimbursed - 34,140 TOTAL 42,13921,163 53,94,48,797 RPT/Sales (%) 26.92% 30.12% Ld.AR submitted that this Tribunal has been following RPT filter of more than 15% and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marily engaged in providing custom developed services to offshore clients and it provides software engineering services primarily in custom application development, content management systems, enterprise mobility, Big Data analytics. Ld.AR thus submitted that this company is functionally not at all similar with a captive service provider like assessee that this providing Ltd services to its associated enterprises. 14.3.1.On the contrary Ld. CIT DR, referring observations of DRP in para 3.6.1 submitted that the activities of company fall under the gamut of software development has categorised by company itself and that the information obtained under section 133 (6) is sufficient enough to come to such conclusions. However he submitted that this comparable also may be sent back to learnt AO/TPO for verification. 14.3.2. We have perused submissions advanced by both sides in light of records placed before us. It is observed that the annual report of this company categorises the diversify services provided by this company under software development segment. We also note that this company is basically into application development for web and mobile and provides customised services to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Harbinger Systems Pvt.Ltd., Isummation Technologies Pvt.Ltd and Maveric Systems Ltd. on functional similarities. At the outset both sides submitted that DRP in its order has some really rejected the comparables without considering the submissions advanced by assessee. It has been submitted by both sides that these comparables could be set aside to Ld.AO/TPO for reconsidering on the basis of far analysis. Based upon the above submissions by both sides, we set aside this issue back to Ld.AO/TPO for reconsideration of Sankhya Infotech, Athena Global Technologies, Evoke Technologies Pvt.Ltd., Harbinger Systems Pvt.Ltd., Isummation Technologies Pvt.Ltd and Maveric Systems Ltd. 16. Sales and Marketing Support service segment: Ld.AR submitted that assessee seeks exclusion of Ugam Solutions Pvt.Ltd., Axience Consulting Pvt.Ltd., Platinum Advertising Pvt.Ltd. for functional dissimilarities. 16.1. Ugam Solutions Pvt.Ltd., Ld.AR submitted that complete set of annual report of this comparable is not available in public domain. He submitted that relevant extract of database available from website are placed at page 1421-1423 of paper book is volume 3 from which at page 1423 this company h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under each segment. Annual report at page 1431 records that this company is knowledge solution business intelligence and consulting firm providing high-quality solutions. In our considered opinion functions performed by this company cannot be compared with Ltd back-office support provided by assessee to its associated enterprises under sales and marketing segment. Accordingly we direct exclusion of this comparable from final list. 16.3. Platinum Advertising Pvt. Ltd. Ld.AR submitted that this comparable is functionally not similar with assessee as it caters to advertising agencies and media planning, buying and selling of media spaces and ancillary services. It is also been submitted that there is no segmental details available and insufficient information about this comparable on public domain. 16.3.1. Ld.CIT DR on the contrary submitted that this company is and assessee before us provides advertising services to its associated enterprises. He thus submitted that functionally this comparable is similar with that of assessee. 16.3.2. We have perused submissions advanced by both sides in light of records placed before us. We note that authorities below has summarily included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6 which subsequently upheld by Hon'able Delhi High Court vide order dated 21/07/16 in ITA No. 379/2016, also upheld by Hon'ble Supreme Court vide order dated 21/07/17, in CC No. 4956/2017. 17.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances. 17.4. On the contrary Ld.CIT.DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of the contentions, he placed reliance on decision of Delhi Tribunal order in Ameriprise India Pvt. Ltd. vs. AC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. In so far as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. 17.7. We have perused the submissions advanced by both the sides in the light of the records placed before us. This Bench referred to decision of Special Bench of this Tribunal in case of Special Bench of ITAT in case of Instrumentation Corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in accordance with law. Accordingly these ground raised by assessee stands allowed for statistical purposes. 18. Ground No.8 raised by assessee towards disallowance of Rs. 61,37,356/- towards service tax paid on expenses. Ld.AR submitted that the service tax input of Rs. 61,37,356/- relates to the 1st quarter of financial year 2014-15 relevant to assessment year under consideration. He submitted that service tax incurred as part of expenses was accounted separately with expectation that it would be set off against service tax payable or a refund would be received by assessee. Subsequently as the same did not happen service tax was debited to the profit and loss account separately instead of accounting it as a part of respective aspect expense account. He submitted that the service tax input couldn't be utilised in the 1st quarter, as there was no output tax on marketing support services provided by assessee. Further he submitted that due to certain amendments in the indirect tax loss, assessee was liable to pay service tax on the marketing support services only from October 2014 and in order ..... X X X X Extracts X X X X X X X X Extracts X X X X
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