TMI Blog2022 (10) TMI 836X X X X Extracts X X X X X X X X Extracts X X X X ..... ts for establishing arms length price - HELD THAT:- From the factual position of the present case, where the segmental data of I2A and I2B for transaction with the assessee are placed on record against which the margin of the assessee has been bench marked for its arms length price, respectfully following the findings given by the Co-ordinate Bench in assessee s own case [ 2020 (2) TMI 1222 - ITAT KOLKATA ], we do not find any infirmity with the findings given by the Ld. CIT(A) and accordingly, delete the additions made in this respect. Accordingly, grounds taken by the revenue on this issue for AY 2015-16 are dismissed. Transfer Pricing adjustments in respect of export of software services and receipt of account management charges - HELD THAT:- We find that the TPA are primarily on the basis of issues which have already been dealt in these two present appeals in the above paragraphs relating to selection of tested party as foreign AEs and acceptance of segmental accounting data vis- -vis entity level data of the foreign AEs. TPO has rejected the claim of the assessee of taking the tested party as foreign AEs and resorted to taking comparables from the domestic companies. TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d law point of the case, the order of the Ld. CIT(A) is erroneous for treating the overseas associated enterprises as 'tested party' and deleting the total adjustment. 2. In the facts and circumstances and law point of the case, the order of the Ld. CIT(A) is erroneous because in absence of break-up of the expenditure incurred by the assessee and also without ascertaining the nature / utility of the software, it is simply not possible for the AO to ascertain whether software were useful for the day-to-day purpose or it gives enduring advantage to the assessee. 3. The appellant craves the leave to make any addition, alteration, modification etc. of the grounds either before the appellate proceedings, or in the course of appellate proceedings. 3. Revenue has raised the following grounds of appeal in AY 2015- 16: 1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the adjustment made by the AOITPO' amounting to Rs. 21,25,44,085/- on account of i) export of software services and ii) payment of Account Management charges. 2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r AY 2014-15 on 20.11.2014 reporting a total income of Rs.163,93,56,650/- and for AY 2015-16, the return was filed on 28.11.2015 reporting total income of Rs.169,46,76,330/-. For both the years. the returns were selected for scrutiny assessment through CASS for which statutory notices were issued and duly served on the assessee and were duly complied in the course of assessment proceedings. The assessee is engaged in the business of information technology and I T consultancy services. Assessee is a wholly owned subsidiary of ITC Ltd. providing software services to its AEs as well as third party clients based in India and overseas. 6.1. Assessee has its software development centers based in Bengaluru, Kolkata, Pune and Trivendrum. Services catered by the assessee include banking and financial sector, consumer package goods, hospitality, media, entertainment, manufacturing, hotels, travel, transportation and logistics etc. Assessee has two subsidiaries in USA and UK viz., ITC Infotech USA (I2A) and ITC Infotech UK (I2B) respectively which were acquired from ITC Ltd. In the Form 3CEB and the Transfer Pricing Study Report filed by the assessee, it was stated that assessee has set up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iz. receipt of marketing and administrative support services and provision of management support services. The assessee has followed a transaction level approach for undertaking benchmarking analysis in its Transfer Pricing Study ('TP Study') wherein all international transactions have been analysed separately and the margin earned by 'least complex entity' has been benchmarked from arm's length perspective. In addition, the assessee had also provided IT services to its other AEs, British American Tobacco Shared Services, Pyxis Solutions LLC and Surya Nepal Private Limited. The benchmarking approach in the TP Study for all the above transactions entails carrying out a detailed functional, asset and risk analysis ('FAR') and economic analysis for each transaction. Based on the FAR analysis and the facts and circumstances of the respective transaction, assessee had benchmarked the profitability of the respective transaction. Thus, the economic analysis including the selection of tested party is based on the FAR profile of the transacting entities. The determination of margin for the tested party for the purpose of benchmarking analysis, is based on data de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. CIT(A) accepted the contention of the assessee, that foreign AEs can be considered as the tested party. Aggrieved by the order of ld CIT(A), the Revenue is in appeal before the Tribunal. 8.5. Learned DR for the revenue submitted before us that ld. CIT(A) was not justified in accepting the contention of the assessee, that foreign AEs can be considered as the tested party for establishing arm s length price. In case of foreign AEs, accounting year ending is (January to December) 31st December every calendar year whereas in case of Indian entity, the accounting year ending is (April to March) 31st March every fiscal year. Therefore, it is not possible to compare the financial statements of foreign AEs, with Indian entity. If the foreign AEs are selected as tested party then it becomes difficult to find comparable companies for TP analysis. In case of foreign AEs, the revenue recognition method, expenses recognition method, and inventory valuation and recognition method are different therefore comparison of financial data is not possible, hence the foreign AEs should not be selected as a tested party. 8.6. On the other hand, ld Counsel for the assessee defended the order pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eur, therefore I3L should not be the tested party. At this juncture, it is appropriate to go through the findings of Ld CIT(A), which is given below: The next major contention raised by the Assessee is on the selection of foreign AE as the 'tested party'. The concept of 'tested party' is the very base of any transfer pricing analysis and it is a well-established principle (upheld by Indian judiciary and international guidance) that the tested party is the one performing lesser functions and carrying lesser level of risks. The Assessee has placed reliance on the following literatures to substantiate the point that the least complex entity is selected as the tested party: United Nation's Practice Manual on Transfer Pricing for Developing Countries, 2013 (Chapter 10- Country Practices- India); (Para 10,4.1.3) United Nations Practical Manual on Transfer Pricing for Developing Countries, 2017 (Part DCountry ^Practices- India); (Para D.3.2.3) OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2010 (OECD TP Guidelines); (Para 3.18) US TP Regulations (Section 1.482-5 of the Internal Revenue Service (IRC)) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 016) 68 taxmann.com 322 (Delhi - Trib.) has overruled the earlier ruling in case of Ranbaxy Laboratories Ltd [[2008] 110 ITD 428 (DELHI)] which was relied upon by the Ld. TPO while rejecting overseas entities as the tested party . Further, the Mumbai tribunal in its case of Tata Motors European Technical Center Pic [2016] 66 taxmann.com 10 (Mumbai - Trib.) has also overturned the rulings pronounced in the case of Onward Technologies Limited [[2013] 26 ITR(T) 734 (Mumbai - Trib.)] and Cybertech Systems Software Limited [[2013] 144 ITD620 (Mumbai - Trib.)] which was relied upon by the TPO in his TP Order. Combined to this, I am also in receipt of the jurisdictional ITAT ruling in the case of Development Consultants Limited (ITA No. 1591/KOL/2010) and Landis + Gyr Limited (ITA No. 37 and 1623/Kol/2012 (supra) which are in favour of the Assessee. Judicial jurisprudence suggest that if there are rulings with different opinions on the same issue, then the jurisdictional authorities ruling should be given weightage, Also, if an earlier ruling is ruled down by a later date ruling on the same issue, the latest ruling will get more weightage. Further, the jurisdictional Kolkata Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... east complex entities, as reproduced in the order of Ld. CIT(A). This discussion has also been reproduced in the order of the Co-ordinate Bench of ITAT, Kolkata in assessee s own case in para 13. The conclusion drawn by the Co-ordinate bench after considering the discussion of TPO is reproduced as under: It is abundantly clear that ld TPO has also stated that subsidiaries act primarily as marketing arm of the assessee and perform administrative services. It is the assessee which is entrusted with the task of performing the non-administrative, core and essential services. Therefore, the ld TPO has himself accepted that assessee is more complex entity and foreign AEs are least complex entity. Considering the factual position narrated above, it is abundantly clear that foreign AEs are least complex entity therefore foreign AEs should be treated as tested parties. That being so, we decline to interfere with the order of Id. C.I.T.(A) in treating foreign AEs as tested party. His order on this issue is ,therefore, upheld and the grounds of appeal of the Revenue are dismissed. 12. Considering the factual matrix in the present case, we find that there is no change in fact pattern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.2. From the table above, expenditure incurred on purchase of application software amounting to Rs.1,20,36,864/- was treated as capital expenditure by the ld. AO while concluding the assessment as against the claim of the assessee of treating the same as revenue expenditure. Assessee went in appeal before the Ld. CIT(A) and submitted that expenditure incurred on the purchases of application software have not resulted in any enduring benefit to the assessee and have been charged as revenue expenditure in the P L Account. It was further submitted that these application software have limited useful life and are used as tools of business like any other component or consumable items used for the purpose of earning revenue. Assessee submitted that it has incurred these expenses to fine tune its business operations to enable the running of its business more effectively, efficiently and profitably. It was also submitted that this issue has already been dealt in the assessee s own case for AY 2005-06 and 2006- 07, held in favour of the assessee by the Co-ordinate bench of ITAT, Kolkata in its order dated 09.01.2015. It was also submitted by the assessee that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding given by the Co-ordinate bench is extracted below for ready reference: 27. Expenditure incurred on the purchase of the application softwares used exclusively for the purpose of the business of the assessee company amounting to Rs. 55,16,940/- has been charged as revenue expenditure and debited to the Profit and loss account. These application softwares have not resulted in any enduring benefit to the company. Hence the expenditure is not classified as capital expenditure. These were approximately treated as revenue expenditures and were claimed accordingly for the purpose of Income Tax too. These application software, have had limited useful life and are used as tools of business like any other component or consumable item used for the purpose of earning revenue. The assessee company has incurred these application software expenses to fine tune its business operations thereby, enabling the running of its business more effectively, efficiently and profitably. We note that while disallowing the expenditure incurred on purchase of application softwares the Assessing Officer ignored the fact that Application softwares are used by the assessee for the efficient conduct of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... needs and requirements... . 22. Aggrieved by the action of the ld TPO, the assessee carried the matter in appeal before ld CIT(A), who has accepted the segmented data/ segmental report observing the following: Having carefully considered the observations of the ld. A.O. / TPO and the submissions of the assessee / ld. A.R. of the assessee company, I find that one of the contentions raised by the assessee and the ld. TPO is on the use of the segmental data of the overseas entities by the Ld. TPO for a transfer pricing analysis. The Ld. TPO had rejected the segmental accounts of the overseas entities used by the Assessee for the transfer pricing analysis mentioning that the segmental data which prepared the Assessee, was not audited either by the statutory auditors or the transfer pricing auditors. On this issue, the Assessee has produced judicial pronouncements before me, wherein the ratio emerges that the segmental accounts used in a transfer pricing analysis need not be audited. The Hon'ble ITAT in Lummus Technology Heat Transfer BV [2014] 162 TTJ 263 (Delhi - Trib.) has held that it is not necessary that a computation should be based on segmental accounts in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng system in place. With such view of the matter, I am not inclined to agree with the Ld TPO / AO, and hold that the segmental accounts maintained by the Assessee can be used for the transfer pricing analysis as done in the TP Study. 23. Aggrieved by the order of ld CIT(A), the Revenue is in appeal before us. We have heard both the parties and perused the material available on record. We note the assessee explained before ld TPO in thread bare detail of functional analysis of the transactions and the Ld. TPO has failed to give due cognizance to the essence of the respective transaction. All the transactions are independent in terms of activities, purpose and through binding agreement. The cost of rendering/ receipt of services are also captured separately in the accounting system. In support of the same, the assessee has provided the segmental data of I2A and I2B for transactions with the assessee, the margin of which was benchmarked from arm's length perspective. We have gone through the findings of ld CIT(A) and do not find any infirmity. That being so, we decline to interfere with the order of Id. C.I. T.(A) in deleting the aforesaid additions. His order on this addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infotech USA Inc Export of software services 162,63,58,599 Transactional Net Margin Method (TNMM) 3. Pysix Solutions LLC Export of software services 1,50,12,144 Cost Plus Method (CPM) 4. Surya Nepal Private Limited Export of software services 5,43,97,230 Cost Plus Method (CPM) 5. British American Tobacco Shared Services Export of software services 45,27,22,410 Transactional Net Margin Method (TNMM) 6. ITC Infotech Limited UK Receipt of Account management services 33,93,71,718 Transactional Net Margin Method (TNMM) 7. ITC Infotech USA Inc. Receipt of Account management services 1,29,26,358 Transactional Net Margin Method (TNMM) 15.2. Views of the ld. TPO on the issue under consideration are summarily listed as belo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities are performed by 12A I2B. Similarly for mapping the clients, liasioning with customers, client coordination etc. it has been mentioned that only the AEs are performing these functions whereas inside sale services are being provided by the assessee's call center. Hence, the functional analysis undertaken by the assessee was factually incorrect and contrary to the facts on record. 4. The functional analysis undertaken by the assessee suffers from apparent infirmities. Virtually the entire risk is borne by the assessee. Therefore 25% of the total revenue is on the higher side and deserves to be trimmed down to lower levels. The TPO relied on the decision of Cybertech Systems Software Limited Vs. Asst. CIT (33 taxmann.com 371). Further, reliance was also placed on Delhi Bench of ITAT in case of. Ranbaxy Lab Ltd Vs Addl, CIT CAY 2004- 05) wherein the ITAT rejected the assessee's case since it has taken foreign AEs as 'tested parties' and calculated its ALP. 5. Further the financials of the AE$ were prepared following the US .UK GAAP. which is very different from the Indian GAAP. The method of accounting, allocation of costs, recognition of reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rforming the entire set of marketing functions and limited functions are performed by the foreign AEs without even acknowledging the fact that these transactions were not undertaken by the appellant - company during AY 2015-16. Further, the Ld. TPO has stated that the appellant-company follows revenue sharing model of 25%/75% even though the appellant-company follows a cost plus approach. Thus, the basis on which the Ld. TPO arrived at the conclusion is itself inaccurate and needs to be dismissed. 2. The said matter has also been allowed for the AY 2010-11, AY 2011-12, AY 2012-13, AY 2013-14 and AY 2014-15. Therefore, for the reasons stated above, I am in agreement with the analysis of the Appellant and conclude that the overseas associated enterprise be accepted as the tested party being the least complex of the transacting entity and hence the above mentioned grounds stand allowed in entirety. Xxxxx 1. On careful examination, I observe that this issue is also exactly similar and covered in favour of the appellant by my erstwhile order passed for the Ay 2010-11, AY 2011-12, AY 2012-13, AY 2013-14 and AY 2014-15. The segmental accounts prepared for a transfer prici ..... X X X X Extracts X X X X X X X X Extracts X X X X
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