TMI Blog2021 (8) TMI 1360X X X X Extracts X X X X X X X X Extracts X X X X ..... with Ld. TPO s approach in allocating the same on the basis of sales. The method adopted by the assessee was more scientific and supported by guidance note issued by the Institute of Cost Accountants of India for allocating administrative overheads which provide for number of employees as one of valid allocation key. Therefore, the assessee s PLI of 21.36% 21.53% with respect to OTI-USA OTG-Germany was to be accepted. We order so. Comparable selection - Assessee is engaged in providing Engineering Design Services (EDC) to its various overseas customers through its marketing arm in the form of Associated Enterprises (AE) in USA and Germany. It is evident that the AEs are remunerated at lump sum marketing-fees which were in the range of 3% to 3.5% and rest of the revenue would accrue to the assessee, thus companies functinally dissimilar with that of assessee need to be deselected. Since the assessee s PLI is much better than average PLI of remaining comparable entities, the transactions under consideration are to be considered at Arm s Length Price. We order so. The impugned TP adjustments, as confirmed in the impugned order, stands deleted. Equity investments - re- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by agreement, invoices raised by M/s Orasoft and consequent debit note raised by AE on the assessee. The only doubt raised by Ld. TPO is tangible evidence with respect to receipt of services. TPO has also doubted the genuineness of the invoices. However, there are no concrete findings or material which would justify rejection of assessee s explanation and documentary evidences. The Ld. CIT(A) also erred in rejecting these documentary evidences without any sound basis. Therefore, not concurring with the approach of lower authorities, we direct for deletion of this adjustment. TP adjustment on account of Share Application Money - As there was end-to-end billing by OTI-USA to assessee s customers vis- -vis amount billed by assessee to OTI-USA. The aforesaid fact remains uncontroverted before us also. This being the case, no benefit arose to assessee s AE and therefore, there would be no question of computing ALP of the same. Concurring with the conclusion of Ld. DRP, we dismiss Ground Nos. 1 2 of revenue s appeal. Margin of 5% as retained by OTG-Germany - We find that percentage of revenue earned from this entity is merely 1.71% of total revenue earned by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. However, the only ground urged before us is ground no.2 which read as under: - 2. ADJUSTMENT IN ARMS LENGTH PRICE ( ALP ) OF RS.7,33,02,289 TO THE INTERNATIONAL TRANSACTIONS: 2.1 On the facts and circumstances of the case and in law, the Ld. CIT (A) erred in confirming the adjustment in ALP of Rs.7,33,02,289 to the value of international transactions. 2.2 The Ld. CIT (A) erred in confirming the adjustment to the ALP on account of the following: 2.2.1 Transaction towards IT Enabled Services of Rs.2,01,51,590: 2.2.1.1 The Ld.CIT(A) erred in confirming ITES companies as comparable companies instead of EDS companies 2.2.1.2 The Ld. CIT(A) erred in upholding that the Ao has rightly allocated indirect overheads based on sales ratio 2.2.1.3 The Ld. CIT (A) erred in not accepting appellant contention that it is a section 10A unit and that there could not be any intention to shift profits. 2.2.1.4 The Ld. CIT(A) failed to appreciate that; Appellant being engaged in the business of rendering EDS/CAD related services, comparables from ITES sector cannot be considered while computing ALP; Allocation of indirect overheads should be mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, expenditure of Rs.13,35,125/- towards discount on Employee Stock Option Plan debited to Profit Loss Account during the year under consideration be allowed as deductible expenditure u/s 37 of the Income Tax Act, 1961 while computing income under the heard profit and gains of business. We find that similar additional ground has been admitted by the Bench in its order for AY 2007-08, ITA No.7512/Mum/2011 order dated 09/10/2019 in assessee s own case, a copy of which is on record. Therefore, adopting consistent approach in the matter and applying the ratio of decision of Hon ble Supreme Court in the case of National Thermal Power Co. Ltd. V/s CIT (229 ITR 383), we admit this ground of appeal as ground No.3. At the same time, we find that this issue is squarely covered in assessee s favor by the decision of special bench of Tribunal in the case of Biocon Limited V/s DCIT (144 ITD 21) as approved by Hon ble Karnataka High Court which is reported at 121 Taxmann.com 351. Similar is the decision of Hon ble Madras High Court in PVP Ventures Ltd. (211 Taxman 554) and decision of Mumbai Tribunal in HDFC Bank Ltd. (155 ITD 765) where such expenses has been held to be an allowable expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers in the areas of Engineering Design Services (EDC) and IT Consultancy Services. It uses tools like computer-aided-manufacturing (CAM) and computer- aided-engineering (CAE) for rendering services to various industries like automobile, semi-conductor, toys and general engineering like sheet metals, castings and plastics. The services being rendered by the assessee has been classified by Ld. Transfer Pricing Officer (TPO) as Information-Technology enabled services (ITeS). 2.3 Since the assessee carried out certain international transactions with two of its Associated Enterprises (AE) as referred to above, the same were referred to Ld. Transfer Pricing Officer-II(5), Mumbai (TPO) u/s 92CA(1) for determination of Arm s Length Price (ALP). The Transfer Pricing (TP) adjustment as proposed by Ld. TPO, in its order dated 21/10/2011 u/s 92CA(3), were incorporated in draft assessment order dated 28/12/2011. The assessee did not prefer objections before Ld. DRP and accordingly, final assessment order was passed on 04/02/2012 in accordance with TP adjustment as proposed by Ld. TPO. Though the assessee preferred further appeal before Ld. CIT(A), however, the appeal was partly allowed in im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... located these expenses on the basis of number of persons employed which was not correct method. By re-allocating the expenses in the ratio of sales, Ld. TPO revised PLI of transactions with OTI-USA to 17.69% and PLI of transactions with OTH-Germany to 15.19%. 3.3 Proceeding further, Ld. TPO observed that the search was made by the assessee using Prowess database and did not explore comparables in other databases like Capitaline Plus etc. to broad base the search criteria. Therefore, Ld. TPO proceeded to conduct fresh search after applying certain filters. As a result, all the 7 comparable entities selected by the assessee got rejected on certain filters viz. Related Party Transaction (RPT) filter, export filter, absence of segmental Profit Loss for ITeS etc. It was also held that assessee s TP documentation was not correct and reliable and therefore, the same was to be rejected. 3.4 Using Prowess and Capitaline Plus databases, Ld. TPO picked-up 22 comparables entities having mean margin of 27.53% which are tabulated in para-12 of Ld. TPO s order. The assessee opposed the disturbance of its own PLI and relied upon Rule-10D (4) for the submission that the information and docu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - ALP of Transactions with AE, USA Operating Cost Rs.13,47,53,000/- Arm s Length Mean Margin 130.65% of the operating cost Arm s Length Price (ALP) @130.65% of operating cost Rs.17,60,54,794/- Price Received Rs.16,85,93,000/- Shortfall being adjustment u/s. 92CA Rs.1,74,61,794/- ALP of Transactions with AE, Germany Operating Cost Rs.1,54,61,000/- Arm s Length Mean Margin 130.65% of the operating cost Arm s Length Price (ALP) @127.53% of operating cost Rs.2,01,99,796/- Price Received Rs.1,75,10,000/- Shortfall being adjustment u/s. 92CA Rs.26,89,798/- 4. TP Adjustment arising out of Equity Investment 4.1 It transpired that the assessee made equity investment Rs.781.96 Lacs in its AE namely OTI-USA. The assessee was show-caused as to why the same be not treated as unse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder. Appellate Proceedings 6.1 During appellate proceedings, the assessee submitted that the price of off-shore services was to be established by the assessee. The payment for services rendered was made by customers directly to its AEs. The assessee would raise an invoice on AEs on quarterly basis. The OTI-USA (AE) was entitled to retain marketing fees of 3.5% whereas OTG-Germany was entitled to retain marketing fees of 3%. On the other hand, the assessee was eligible for entire revenue. In other words, the AEs only retained lump sum marketing fees and all the remaining revenue belonged to the assessee. The assessee also assailed the rejection of basis of allocation of indirect expenditure and submitted that allocation method adopted by the assessee was most correct and stable method to allocate indirect costs. As per assessee, the allocation of indirect overheads was to be made as per Cost Accounting principles. The methodology of cost allocation as adopted by the assessee was stated to be in accordance with Guidance Note on Cost Accounting Standard on Administrative overheads issue by the Institute of Cost Accountants of India which provided for allocation of cost based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... timately affected its profitability and would not have provided the requisite cash-flow to carry on its business swiftly. The assessee, as a holding company, had infused funds in its subsidiary with a long-term objective through equity mode so as to enable the AE to carry on its business smoothly and swiftly. Reliance was placed on various judicial pronouncements to strengthen all these arguments. 6.3 Regarding reimbursement of expenses to acquire software from third-party, the assessee submitted that USA-AE made payment on behalf of assessee to Orasoft from time to time. At year-end, a consolidated debit note / invoice was raised by the AE. There was no cash flow from assessee to AE but the expenditure was merely debited under the head work-in-progress. No deduction of the expenditure was claimed and therefore, the adjustment was not justified. These transactions were stated to be purely reimbursement in nature. 7. The Ld. CIT(A) observed that the services rendered by the assessee would fall within the segment of ITeS. The argument on allocation of cost was also rejected. The plea of foreign AE as a tested party was to be rejected in view of Tribunal decision in assessee s o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be taken as tested party for the purpose of benchmarking. However, we find that this plea has not been accepted by the Tribunal in assessee s own case for AY 2006-07. The Ld. AR has also sought distinction between Engineering Design Services (EDC) and ITeS. The same is also to be rejected in view of the fact that it is admitted position, all along, that EDC services are part of ITeS and not a distinct segment which has to be benchmarked separately particularly in view of the fact that the benchmarking was done by adopting Transactional Net Margin Method (TNMM) which requires fulfilment of only broad parameters. The plea that the assessee was eligible for deduction u/s 10A would also not be much material to the issue of determination of Arm s Length Price of international transactions. The remaining arguments taken by the assessee have been dealt with in the next paragraphs. 9. So far as the computation of assessee s own PLI is concerned (as placed on page no. 316 of the paper-book), we find that the same has been disturbed by Ld. TPO by changing the allocation key in the following manner: - Cost Basis of Allocation (As per assessee) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame have been placed on record. The entities, the exclusion of which has been sought by the assessee, are as follows: - No. Name of the comparable PLI (OP/TC) % 1. Accentia Technologies Ltd. (Seg.) 41.76% 2. Acropetal Technologies (Seg.) 35.30% 3. Coral Hubs Ltd. 50.68% 4. Eclerx Services Ltd. 65.88% 5. Genesys International Corporation Ltd. 47.40% 6. Mold-Tek Technologies Ltd. 96.66% After going through the cited decisions, our adjudication would be as follows: - (i) Accentia Technologies Ltd. This entity has been excluded by Mumbai Tribunal in the case of Deutche CIB Centre Private Limited V/s ACIT (ITA No.134/Mum/2013; 09/11/2020) wherein the bench has directed for exclusion of this entity by observing that there was extraordinary event of amalgamation during the year which had resulted into eno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its total expenses. Thus, this entity was held to be functionally different. Similar is the decision of this Tribunal in WNS Global Services (P.) Ltd. V/s ITO (103 Taxmann.com 75) wherein this entity is found to be non-comparable entity for ITeS segment for the reason that this entity provided data analytics and data processing solutions which was more in the nature of KPO services. As per its annual report, this entity provided services to the banking, finance, manufacturing, retail, travel and hospitality verticals using a mix of custom, design, process and delivery teams. This entity was found to have intangibles also. Following the above decisions, we direct for exclusion of this entity. (v) Genesys International Corporation Ltd. This entity has been excluded by Tribunal in WNS Global Services (P.) Ltd. V/s ITO (103 Taxmann.com 75) on the ground that this entity was engaged in rendering GIS services and it catered to the needs of consumer mapping, navigation etc. It provides geographical information service, photogrammetry, remote sensing, cartography, data conversion related computer-based services and other related services. Thus, it was held that this entity p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch ITA No. 6381/Del/2012 IHG IT Services (India) Pvt. Ltd. vs. DCIT, Circle 11(1), New Delhi Hon. ITAT, Delhi Bench. ITA No. 6408/Del/2012 Blackrock Services India Pvt. Ltd vs. ACIT, Circle 1(1), Gurgaon Hon. ITAT, Delhi Bench. 12. We find that after exclusion of the above-mentioned comparables, the Profit Level Indicator (PLI) of remaining comparable entities as finally taken by Ld. TPO, would be as follows: No. Name of the comparable PLI (OP/TC) % 1. Aditya Birla Minacs Worldwide Ltd. 2.20% 2. Asit C Mehta Financial Services Ltd. (Seg.) 9.42% 3. Caliber Point Business Solutions Ltd. 10.97% 4. Cross domain Solutions Ltd. 26.96% 5. e4e Healthcare Solutions Ltd. 16.72% 6. Iservices India Pvt. Ltd. 9.58% 7. R Systems International (Seg.) 4.30% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual matrix as enumerated by us in the preceding paragraphs, the undisputed position that emerges is the fact that the assessee has advanced Share Application Money to one of its AE situated in Saudi Arabia with a view to acquire further stake in that entity. The entity has become wholly owned subsidiary of the assessee company during the month of January, 2009. The financial health of its AE was not good and the money was advanced with a view to infuse further capital in the AE and with a view to acquire controlling stake in its AE. The money has been utilized by its AE to pay-off business debts and to meet working capital requirements. Another undisputed fact is that ultimately the shares have been allotted to the assessee during December, 2015 after getting the desired regulatory approvals from concerned authority i.e. SAGIA. It is also undisputed fact that there was delay in the legal process which has been substantiated by the assessee, inter-alia, by furnishing email correspondences etc. The entirety of the facts and circumstances would demonstrate that the investment made by the assessee was for genuine business purpose and the stated transaction was not found to be a sham t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e at year-end against the assessee. The amount so paid was duly reflected by the assessee as advance for software in the Balance Sheet. The copies of the invoice raised by Orasoft and copies of invoice raised by overseas-AE have been placed on record (page 492 496 of paper-book). It could be seen that M/s Orasoft has invoiced assessee s AE on various dates from time to time. M/s OTI-USA has charged the assessee by way of debit note at year-end. The overseas-AE has entered into software development agreement with Orasoft on 01/04/2007. Upon perusal of the terms, it could be seen that this agreement has been entered on behalf of assessee wherein the assessee as a software-developer has engaged the services of Orasoft for developing software tools, utilities and modules for onsite and off-shore business and other project management requirements. In terms of clause-5 of the agreement, M/s Orasoft has assigned all intellectual property rights created into relation to the services in favor of the assessee. Thus, it could be seen that the services of M/s Orasoft has been availed by the assessee only. The AE has merely carried out the transactions on behalf of the assessee. The payment m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted on refund of share application money without properly appreciating the fact that the assessee has transferred the benefit of fund to A.E. in the name of Share Application Money. 16.3 The assessee has raised 4 grounds out of which ground no.3 has not been pressed whereas ground no.4 is related to initiation of penalty which is pre-mature. Therefore, ground nos. 3 4 stand dismissed. The assessee has raised additional ground of appeal which is similar to additional ground raised in AY 2008-09. Since this ground has been admitted in AY 2008-09, the same is admitted in this year also as Ground No.5. The grounds to be adjudicated are Ground Nos. 1, 2 5 which read as under: - 1. Adjustment in ALP of Rs.15,59,397/- to the value of International Transactions 2. Non grant of claim made for Late Employees Contribution to PF ESIC of Rs.81,30,617/- 5. Allowability of expenditure of Rs.23,83,807/- towards discount on Employee Stock Option Plan (ESOP) debited to the Profit Loss Account It is evident that the appeal of the revenue arises out of deletion of TP adjustment. The assessee is similarly aggrieved by confirmation of certain TP adjustments. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Simon India Ltd. 6.88% 11. Acropetal Technologies Ltd. 21.30% 12. HDO Technologies Ltd. 13.94% 13. Mold-Tek Technologies Ltd. 60.92% 14. Bodhtree Ltd.64.82% Average PLI Margin 28.58% Applying the same, the TP adjustment was thus computed at Rs.1749.13 Lacs in the following manner: - Operational Cost 36,04,55,105/- 128.58% of operation cost (1) 46,34,73,174/- Sales / Operational Income (2) 28,85,60,121/- Difference (1)-(2) 17,49,13,053/- 105% of Sales / Operational Income (A) 30,29,88,127/- 95% of Sales / Operational Income (B) 27,41,32,115/- It could be seen that the adjustment has been proposed by applying entity level TNMM against the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... percentage of revenue earned from this entity is merely 1.71% of total revenue earned by the assessee. The margin retained by this entity was quite less than mean margin of 8.89% reflected by comparable entities as selected by the assessee in its TP study report (though we do not accept foreign AE as tested party as held in AY 2008-09). Nevertheless, the assessee s segmental PLI of 45.57% was much above the mean margin of comparable entities selected by Ld. TPO. Therefore, no fault could be found in the approach of Ld. DRP. 19. So far as the computation of notional interest on Share Application money is concerned, we find that factual matrix is similar as in AY 2008-09. Therefore, our adjudication as for AY 2008-09 would apply here also. Taking the same view, we would hold that re-characterization of these transactions as loans / advances was not justified and accordingly, we delete the adjustment as made by lower authorities. Ground No.3 of revenue s appeal stand dismissed whereas Ground No.1 of assessee s appeal stands allowed. 20. In ground No.2, the assessee is seeking deduction of late payment of employees PF and ESIC in terms of decision of this Tribunal in assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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