TMI Blog2021 (6) TMI 1133X X X X Extracts X X X X X X X X Extracts X X X X ..... e : Ms. Neera Malhotra, CIT(DR) ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against order dated 21/12/2018 passed by the Ld.DCIT Circle 4(1)(2) under section 143(3) read with section 254 of the Act, on following grounds of appeal: The grounds mentioned herein by the Appellant are without prejudice to one another. 1. That the order of the learned Deputy Commissioner of Income-tax, Circle - 4(1)(2), Bangalore ('learned AU'), dated December 21, 2018, to the extent prejudicial to the Appellant, is bad in law, contrary to the facts and circumstances of the case and is liable to be quashed. 2. That the Dispute Resolution Panel ('learned DRP') erred in not appreciating that the order of the learned Assistant Commissioner of Income-tax (Transfer Pricing) - 2(1)(1), Bangalore ('learned TPO') passed under Section 92CA of the Income-tax Act, 1961 ('the Act') is contrary to law and thus liable to be quashed. 3. That on facts and in the circumstances of the case, in the first round of assessment, the learned DRP/ AO/ TPO erred in making an upward adjustment to the transfer price of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted c) Sasken Communication Technologies Limited d) Tata Elxsi 4.8. Excluding the following companies even though they are functionally comparable to the Appellant and passes all the filters applied by the learned TPO in its order: a) Akshay Software Technologies Limited b) LGS Global Limited 4.9. Not making appropriate adjustments under Rule ioB: a) Differences in accounting practices and depreciation rates adopted by Appellant and companies identified by him as comparable b) Underutilisation of capacity by Appellant c) Employees Stock Option Plan ('ESOP') charged by the parent company of INR 300.84 lakhs evaluated on the Black Scholes method in terms of US generally accepted accounting principles d) Risk profit between the Appellant and the comparable companies 4.10 roviding negative working capital adjustment to account for differences in the working capital between the Assessee and the comparable companies. (Tax Effect: INR 8,961,956) Grounds for marketing support services 5. On facts and in the circumstances of the case, the learned DRP/AO/TPO erred in: 5.1. Stating in its directions th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct revenue while reducing the same from the software development and marketing support units. (Tax Effect: INR 3,496,416) 8. The learned AO/ DRP erred in not allowing deduction for a sum of INR 1,99,91,400 representing cost of ESOP/ RSUs debited to the Company by its parent consequent to stock options/ restricted stock units issued by them to its employees and claimed by the Company in the revised return of income. The learned AU! DRP erred in not appreciating that the said amount is an employee compensation expenditure and has been expended wholly for the purpose of business. (Tax Effect: INR 67,95,077/-) 9. That the learned AO erred in levying interest under Section 234 B of the Act of INR 7,142,540. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal. Brief facts of the case are as under: 2. The assessee is engaged in the business of manufacturing and marketing of semiconductor components. It filed its return of income on 13/10/2010 declaring total income of Rs.4,52,25,320/-. Subsequently, the case was sele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt.Ltd. in ITA No.417/2014 by order dated 27/4/2015. 8. In the remand proceedings, DRP rejected the contentions of assessee seeking inclusion and exclusion of various comparables however, ICRA Techno Analytics Ltd. and Persistent Systems Ltd. were remanded to the Ld.TPO for examining the related party transaction issue as was directed by the Tribunal (supra). 9. On receipt of the DRP directions, the Ld. AO passed the impugned order by revising the Transfer Pricing adjustment at Rs.3,27,20,502/-. 10. Aggrieved by the impugned order so passed by the Ld. AO, assessee is in appeal before us now. 11. At the outset the Ld.AR submitted that, assessee wish to press comparables alleged for inclusion in ground 4.7, ground 4.10, comparables alleged for exclusion in ground 5.6 and comparable alleged for exclusion in ground 5.7. The Ld.Counsel also submitted that assessee wish to press ground No. 8 under the corporate tax issues. 12. It has been categorically submitted that all other grounds are not pressed and therefore these are not adjudicated herein below. 13. Before we undertake the comparability analysis, it is sine qua non to stand the functions performed, the assets o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n/exclusion under both the segments. 15. Ground No.4.7 This ground has been raised by assessee seeking exclusion of Infosys Ltd., Kals Information Systems Ltd., Sasken Communications Technologies Ltd. and Tata Elxsi Ltd. The Ld.AR the outset submitted that all these comparables have been considered for exclusion by coordinate bench of this Tribunal in case of DCIT vs Electronics for Imaging India Pvt.Ltd., reported in (2016) 70 taxmann.com 299 for the very same assessment year 2010-11. On the contrary, the Ld.CIT.DR relied on the observations of DRP are not authorities below. We have perused submissions advanced by both sides in the light of records placed before us. We have also perused the decision relied by the Ld.Counsel referred to herein above. We note that this Tribunal in similar circumstances considered these comparables by observing as under: 4. On the following comparables, the AR submitted that the appellant s turnover is just 13.23 crores, while the turn over of each of the comparable is multiple times higher (say from 28 times to 1601 times higher) than its turnover and hence the DRP correctly excluded them. The summary of AR s contentions on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2013] 140 ITD 540/29 taxmann.com 310 (Bang. - Trib.), this company was found to be not comparable with that of the assessee. 23. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The ld. DR has not disputed the fact that comparability of this company has been examined by this Tribunal in a series of decisions including in the case of Trilogy e-business Software India (P.) Ltd. (supra). We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of Rs. 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP Sasken Communication Technologies: The DRP rejected this company on the ground that the turnover of the company is very high i.e INR 402 crores which is 30 times the turnover of the assessee from ITES business and therefore it was correctly excluded from the list of comparables. Reliance is placed on the following cases: -Bearing Point Business Consulting Pvt. Ltd. ITA No.1124/Bang/2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied out by the Ld.TPO which was confirmed by the DRP. It is the plea of the assessee that though the Ld.TPO observed that the Assessee has a healthy margin, the Ld.TPO erred in making adjustment towards working capital and the DRP further erred in upholding the same. 16.2 It was submitted that, Working capital adjustment is made for the time value of money lost when credit time is given to the customers. It was also submitted that the assessee however does not bear any risk and has no working capital contingencies, and has not incurred any expenses for meeting the working capital requirement, and that the assessee is running the business without any working capital risk as compared to the comparables. The Assessee does not bear any market risk as the services are provided only to its group associates. Therefore, in our view requirement for adjustment of negative working capital does not arise. 32. We draw our support from decision of coordinate bench of this Tribunal in case reported in (2020) 120 com 122 and Lam Research India (P.) Ltd. v. Dy. CIT in [IT Appeal Nos. 1473 1385 (Beng.) of 2014, dated 30-4-2015], Tivo Tech (P.) Ltd. v. Dy. CIT [2020] 117 taxmann.com 259, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The DRP after considering the annual report noted that except the Note 2.14, there is no other observation in the annual report from which it can be established that the company is engaged in marketing and sales support services comparable to the assessee. Accordingly, the DRP directed the AO to exclude the said company from the comparables. 43. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The DRP has considered the fact that payroll processing services was main part of the operations of the company and quantitative details of sales and certain information as required under Part II of Schedule VI to Companies Act was not possible. Thus, in the absence of any contrary fact on record brought before us, we do not find any reason to interfere with the finding of the DRP, when the functions and business activity of this company was found to be different from marketing and sales support services of the assessee. Accordingly, the objection of the Revenue is rejected. (2) Killick Agencies Marketing Ltd. 44. The assessee objected against this company on the ground that commission/service charges income of this company is Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded by Ld.TPO and objected by assessee for reason that it is functionally not similar, as this company is into provision of HR operations and administration services offering payroll processing and compensation restructuring, management of labour and legal compliances and employee reimbursement processing and accounting services. Ld.Counsel submitted that this Tribunal in case of DCIT vs Electronics for Imaging India Pvt.Ltd (supra) and ITO vs Interwoven Software Services (India) Pvt.Ltd (supra) has held this company to be not comparable with company engaged in marketing and sales support services. Ld.CITDR placed reliance upon order of Ld.AO and opposed exclusion of this comparable. 14. We have produced submissions advanced by both sides in the light of the records placed before us. It is observed that annual report of this comparable is placed at page 1390-1408 of compendium of annual reports at page 1392 and loss account, it is observed that income has been earned by this company under two heads being, Service Fees and Other Incomes, for which no details have been provided in schedules to accounts. Respectfully following the view taken by this Tribunal in case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the course of its business, voluntarily and without necessity, but if it is incurred for promoting the business and to earn profit, deduction u/s. 37(1) of the Act has to be allowed. The Hon'ble Court further held that, the fact that somebody other than the assessee is also benefited by the expenditure, should not come in the way of expenditure being allowed as deduction. 18.4 Further, Hon'ble Karnataka High Court in the case of Mysore Kirloskar Ltd. v. CIT reported in (1987) 30 Taxman 467), following the Hon'ble Supreme Court in the case of Sassoon J. David Co. (P) Ltd. (supra), held that the fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed as deduction u/s. 37(1) of the Act. 18.5 Even the Direct Tax Notification No.323 dated 11.10.2011, was issued in exercise of powers conferred u/s. 17(2) of the Act. The Central Government in the aforesaid Notification specified guidelines, which need to be followed when shares are allotted under ESOP scheme. In clause (6) of the aforesaid guidelines, the Central Govt., has laid down that, where shares of a parent company are issued ..... 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