TMI Blog2020 (10) TMI 1354X X X X Extracts X X X X X X X X Extracts X X X X ..... ort the results, then such companies would have to be included in the final set of comparables. From the order of the TPO and the observations of the Ld. DRP no such factors are evident. Therefore, we restore these two comparables to the file of Assessing Officer/TPO for the purpose of including these two comparables after due verification as per law and after giving proper opportunity to the assessee to present its case. Company Sonata Software Limited on the ground that although the TPO had himself applied the related parties transactions filter of 25%, in case of this company, the related party transactions as a percentage of sales was 53.83% - We have gone through the annual accounts of this company and we agree with the contention of the Ld. Authorized Representative that the related party transactions in this company case are more than 50% of sales. Accordingly, this company does not pass the related party filter as applied by the TPO. Accordingly, we direct the TPO to exclude this company from the final set of comparables. Granting of working capital adjustment - Respectfully following the decision of the Coordinate Bench in the case of Goldman Sachs Services Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee s appeal for the same year. Also Cross Objection No.308/Del/2015 has been preferred by the assessee. 2.0 The brief facts of the case are that the assessee company was incorporated in July, 1988 as a wholly owned subsidiary of Microsoft Corporation, US. The company is primarily engaged in rendering Marketing Support Services ( MSS ) to its Associated Enterprises (AEs) i.e. Microsoft Corporation and Microsoft Operations Pvt. Ltd., Singapore. It also provides Microsoft Consultancy Services and Product Support Services. For the provisions of these services, the assessee is remunerated on cost plus 15 % by the AEs. 2.1 The return of income for the captioned year was filed declaring a total income of Rs.20,63,87,027/- after claiming deduction u/s 80G amounting to Rs.1,08,62,475/-. Subsequently, the assessee revised the return of income disclosing total income at Rs.20,81,82,464/-. Since, the assessee had entered into international transactions during the year under consideration, a reference was made to the Transfer Pricing Officer (TPO) and the TPO passed the order u/s 92CA (3) of the Income Tax Act, 1961 (hereinafter called the Act ) proposing an adjustment of Rs.58, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 20,81,82,464/- Part I - Transfer Pricing Grounds 3. That on facts and in law, the Hon ble DRP and the Ld. TPO/AO erred in making an adjustment of INR 3,77,75,992 to the returned income of the Appellant in respect of the international transaction pertaining to provision of MCS IPSS. 4. That on facts and in law, the Hon ble DRP and the Ld. TPO/AO have erred by not following the principle of consistency while determining the arm s length price ( ALP ) of the impugned transaction by ignoring the fact that no transfer pricing adjustment has been made for impugned transactions in past years and neither the functional profile of Appellant nor the methodology adopted by the Appellant to benchmark the same has changed from past years. 5. That on facts and in law, the Hon ble DRP and the Ld. TPO/AO have erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the IT Rules, and conducting a fresh economic analysis for the determination of the ALP for the impugned transaction and holding that it is not at an arm s length. 6. That on facts and in law, the Ld. AO/TPO/DRP have erred by 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reconditions being met in law. 13. The Ld. TPO has erred, in law and in facts, by not discharging the statutory onus to establish that the conditions specified in clause (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the ALP determined by the Appellant and proceeded to determine the ALP himself. Part II- Corporate Tax Grounds 14. That on facts and in law, the Ld. DRP and Ld. AO have erred in disallowing 50% of running and maintenance expenditure amounting to INR 22,450,124 on ad hoc basis with respect to the vehicles that were used by its employees for the purpose of the business of the Appellant. 14.1 That on the facts and circumstances of the case and in law, the Ld. DRP and Ld. AO have erred in disregarding the fact that reimbursement by the Appellant to employees on account of running and maintenance expenditure is an actual expenditure incurred by the Appellant wholly and exclusively for the purpose of its business. 14.2 That on the facts and circumstances of the case and in law, the Ld. DRP and Ld. AO have erred in disregarding the submission made by the Appellant and in stating that no specific argument has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartment in ITA No.1760/Del/2015: 1. Whether on the facts and circumstances of the case and in law, the DRP erred in allowing the payment of Rs. 70 crores as a deduction u/s 43B of the Act without appreciating that this was to meet out the contingent liability and not towards any ascertained liability. 2. Whether on the facts and circumstances of the case and in law, the DRP erred in not adjudicating on the AO's finding that if the deduction u/s 43B of the Act amounting to Rs. 70 crores is allowed, the income of the assessee would be correspondingly enhanced by Rs. 80.50 crore as per the terms of agreement of the assessee with its parent company as the assessee cannot claim expenditure without recognizing corresponding revenue. 3. That the order of the DRP is erroneous and is not tenable on facts and in law. 4. That the appellant craves leave to add, alter, amend or forgo any ground(s) of appeal either before or at the time of hearing of the appeal. 2.4.3 The assessee has also filed Cross Objections by raising the following grounds: 1. That the Ld. Assessing Officer ('AO') has erred on facts and in law in proposing enhancement of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation Technology Limited, the Ld. Authorized Representative argued that different financial year ending is not a relevant basis for exclusion of a particular comparable. It was submitted that the Hon ble High Court of Delhi in the case of CIT vs. Mckinsey Knowledge Centre India Pvt. Ltd., vide order dated 27.03.2015, in ITA No.217/2014 had upheld the order of the ITAT holding that if the comparable is functionally the same as that of the tested party, then, the same cannot be rejected merely on the ground that data for entire financial year is not available. It was submitted that the Hon ble Delhi High Court had held that if from the available data on record, the results for financial year can be reasonably compiled, then the comparables cannot be excluded solely on the ground that the comparables have a different financial year ending. Apart from this order of the Hon ble Delhi High Court, the Ld. Authorized Representative also placed reliance on numerous order of this Tribunal for the proposition that a different financial year ending cannot be the sole basis for rejecting a comparable if the comparable is otherwise functionally similar. 3.2 With respect to the comparable S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute are that in Financial Year 2008-09, relevant to Assessment Year 2009-10, the assessee company had booked year ending provision/accruals of Rs.31,180,867/- in its Profit Loss Account and out of such accruals/provisions, the statutory auditors of the company had reversed the accruals of Rs.2,54,53,475/- being excess in nature at the time of finalization of the accounts and, thus, only net expenses of Rs.57,27,392/- had been debited in the profit and loss account and had been claimed as deduction in the return of income. It was further submitted that subsequently in Financial Year 2009-10, i.e., relevant to the year under appeal, the entire amount of Rs.3,11,80,867/- was automatically reversed in the accounting system (SAP) of the company instead of reversing only Rs.57,27,392/- which had been debited in the immediate preceding years. Thus, an additional amount of Rs.2,54,53,473/- (being the difference between the two amounts) had been offered to tax erroneously. It was further submitted that in Financial Year 2012-13 i.e., Assessment Year 2013-14, the assessee had reversed this additional income of Rs.25,45,53,475/- to square up the accounts and expenses of Rs.2,54,53,475/- had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Motor Car Expenditure, reliance was placed on the concurrent observations of the Assessing Officer and the Ld. DRP. With reference to the accounting error claimed by the assessee and the related relief claimed, the Ld. SR. DR submitted that the assessee had not claimed such error through a revised return and the Assessing Officer had no power to entertain such claim. It was submitted that therefore, in view of the settled judicial precedent in the case of Goetze (India) Ltd. vs. CIT reported in [2006] 284 ITR 323 (SC), the action of Assessing Officer was valid in law. 5.0 Coming to the appeal of the Department, the Ld. Sr. DR argued that the sole issue in the Department s appeal was the issue of Rs.70 Crores of service tax which had been paid by the assessee under protest and the Ld. DRP had erred in directing that the same was an allowable deduction u/s 43B of the Act. It was submitted that the assessee had received a show cause notice from the Service Tax Department alleging non-payment of service tax vide notice dated 24.04.2008 and on 23rd September, 2008 relevant to Assessment Year 2009-10, the Ld. CIT of Service Tax had passed an order confirming demand of service tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two comparables viz. R System International and Helios Matheson Information Technology Limited. It is seen that these two comparables have been excluded by the TPO on the ground that these two companies had a different financial year ending. It is now a consistent view of the various Hon ble High Courts as well as of this Tribunal that if a company is otherwise functionally similar, then, it cannot be excluded only on the ground of having a different financial year ending. For this, we agree with the reliance placed by the Ld. Authorized Representative on the order of the Hon ble Delhi High Court in the case of CIT vs. Mckinsey Knowledge Centre India Pvt. Ltd. in ITA No.217/2014. We note that the Ld. DRP has noted that these companies were using multiple year data and, therefore, these companies were to be excluded. However, a perusal of the paper book filed by the assessee shows that this observation of the Ld. DRP is incorrect as, evidently, the assessee is using a single year data. We also note that the only ground for exclusion, as propounded by the TPO, is the ground that these companies were having a different financial year ending. As we have already mentioned that now it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 7.2. Chapters I and III of OECD Transfer Pricing Guidelines contain guidelines on comparability analyses for transfer pricing purposes. Guidlines on adjustments to be provided is found in paragraphs 3.47-3.54 and in the Annex to Chapter III. The guidelines must be followed for computing arm's length principle, and for comparing comparable uncontrolled transactions. Reasonably accurate adjustments should be made to eliminate effect of any such differences 7.3. Paragraphs 13 to 16 of OECD guidelines, emphasizes need for working capital adjustment in terms of receivables and payables as under: 13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the Price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. 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. Methodology to compute working capital adjustment is given in Paragraphs 13 to 16 of the aforesaid OECD Guidelines (supra). These guideline also indicate factors that needs to considered like; 7.5 The point in time at which the Receivables, Inventory and Payables should be compared between tested party and comparables, and whether it should be the figures of receivables, inventory payable at the yearend or beginning of the year or average of these figures that should be considered;, 7.6. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with Assessee and Department should be the starting point and depending on the facts and circumstances of a case, further details can be called for. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Tribunal in the case of Huawei Technologies India (P.) Ltd. {supra), we direct working capital adjustment to be computed and to allow as per actuals, after considering exclusion/inclusion of comparable companies in the final set of comparables as discussed hereinabove. Accordingly this ground raised by assessee stands allowed. 8.2.1 Respectfully following the decision of the Coordinate Bench in the case of Goldman Sachs Services Pvt. Ltd. (supra) and after duly noting that working capital adjustment had been allowed to the assessee in assessment year 2007-08, we direct the working capital adjustment to be computed and to be allowed as per actuals after considering exclusions/inclusions of comparables companies in the final set of comparables as discussed herein above. 8.3 Coming to the Corporate Tax grounds in the assessee s appeal we find that on the issue of ad hoc disallowance with respect to Motor Car running expenditure, the ITAT in assesee s own case, for Assessment Year 2008-09 in ITA No. 6417/Del/2012 vide order dated 09.02.2016 had directed the deletion of this disallowance. The relevant observations are reproduced herein under for a ready reference: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nswer the issue in favour of the assessee and a direct the Ld. AO to delete the addition made on account of disallowance of car running and maintenance expenses. 8.3.1 Respectfully following the above, we direct the deletion of this disallowance. 8.4 So far as the issue of deduction being claimed towards accounting error of Rs. 25,453,475/- is being claimed, we note that this issue also had arisen in Assessment Year 2008-09 and the ITAT in ITA No. 6417/Del/2012, vide order dated 09.02.2016 had restored this issue to the file of the for verification and allowing relief to the assesee if the assessee s claim was found correct. The relevant directions of the Tribunal are being reproduced here in under: 10. Now coming to grounds No. 4 and 5, it is submitted by the Ld. AR that in the financial year 2007-08, the assessee company has been booking year-end provisions in its profit and loss account and out of such provisions the statutory auditors of the company had reversed half the amount being excess in nature at the time of finalisation of the books of accounts and claimed only the remaining half as deduction in the return of income. However, subsequently in the financial ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed for statistical purposes. 10.0 Coming to the Department s appeal, the sole issue is the addition of Rs.70 Crores paid as a service tax by the assessee and allowed by the Ld. DRP in terms of provisions of Sec.43B of the Act. It is the submission of the assessee that this amount was actually paid and the Ld. DRP has allowed it on payment basis u/s 43B. It is also being submitted that when this amount was finally refunded by the Department in Assessment Year 2016-17, the same has been offered to tax. We agree with the contention of the Ld. Authorized Representative in this regard that the amount was deductible on actually payment basis irrespective of whether the same has been deposited under protest or voluntarily. The Department could not show a cogent reason before us as to why the directions of the Ld. DRP were incorrect in this regard. We not are not agreeable with the contention of the Department that this amount represents contingent liability. Therefore, we find no reason to interfere with the directions of the Ld. DRP in this regard and we uphold the same. Thus, grounds raised by the Department on the issue are dismissed. 11.0 In the result, the appeal of the D ..... X X X X Extracts X X X X X X X X Extracts X X X X
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